The likely default of the emirate of Dubai on its debt is a shot heard round the world – and perhaps heard nowhere as loudly as here in California. As with other countries that rode an unsustainable real estate bubble to overindebtedness and are now facing financial crisis – places like Greece, Hungary, Latvia and Ireland are just some examples – California faces its own looming debt crisis.

The collapse of Dubai is especially significant for California. Dubai was framed as a financial paradise for the wealthy and the celebrity set, built on real estate borrowing, unsustainable use of natural resources (including water), and exploitation of a laboring class that lacked many basic democratic rights and certainly wasn’t participating in the wealth creation.

Those conditions describe a lot of places in the world right now, but Dubai’s basic logic was being used here in California as well, where a real estate bubble was used to promote an economy essentially ordered around serving the interests of the wealthy, with everyone else seeing only cursory benefits that were conditional on the continuation of the bubble. The bubble has burst, and now California faces a crisis every bit as severe as Dubai.

California’s prosperity since 1980 has rested on three asset bubbles, each one larger than the last, culminating in the Great Zeroes Bubble, where both private and public spending were fueled by a mountain of debt. A political system unwilling and unable to raise taxes to capture the wealth and use it to sustain services instead turned in this decade, just as it did in the 1980s and 1990s, to debt to keep the lights on, the teachers in the classrooms, the cops on the beat.

It’s not that debt is bad, per se. It’s instead that since 1978, California has been locked in a mentality that sees debt as the answer to their problems. An economy and a society that had become unwilling to pay for what it needed and wanted found that debt was the magic way to get what you wanted without worrying about how to afford it. And while many Californians have been willing to indeed pay for services, by raising taxes at the state and local level on several occasions since 1978, our political leaders and our post-Prop 13 system made these options difficult or impossible to exercise.

California became a state built on debt. Arnold Schwarzenegger chiseled the principle in place in the 2000s by using debt to balance the state’s budget in 2004, in order to avoid a tax increase he claims, wrongly, was unnecessary.

Again, not all debt is bad. Debt is the right way to fund the large infrastructure projects like high speed rail that will pull us out of the crisis. But it cannot be the only basis for an economy, and it cannot be the only basis for a government. In California, it had become both.

Dan Walters today argues that California has over $500 billion in debt, a sum that might further the comparisons to Dubai – until we look at the details:

Lockyer’s warning pertained to the state’s “general obligation debt,” which currently stands at $59 billion, and there are an additional $50-plus billion in general obligation bonds that have not yet been sold. The biggest chunks of debt, however, are the unfunded obligations for pensions and health care of retired public employees….

state and local pension funds have lost at least $150 billion on investments, so a reasonable estimate of today’s unfunded liability is $200-plus billion. A state commission, meanwhile, says the state-local liability for retiree health care is about $100 billion.

No one keeps complete data on local government general obligation debt, but it appears to be roughly the same as the state’s, perhaps $50 billion, plus several billion dollars in debt incurred by local redevelopment agencies.

Walters uses this to argue that the $11 billion water bond might be “the straw that breaks our back” and that we will want to consider not taking on as much debt or paying some of it down.

I don’t agree. My jeremiad about California’s dependence on debt offered above isn’t intended as a “deficit hawk” argument. Instead it is intended to say that debt should be used wisely, and dealt with sensibly – not out of reckless panic.

More below.

If you assume that we have to pay the $500 billion or so all at once, then yes, California has a very serious debt crisis, and calls to stop adding to it and start paying it down will gain traction.

But we don’t. Much of the liability – $200 billion for pension obligations and $100 billion for retiree health care – will be paid out over time. And that gives us time to craft solutions that aren’t neo-Hooverite rollbacks of benefits, but that sustain and even expand public services to deal with both the fiscal and economic crisis.

The first step is conceptual. The best way to pay back debt is to earn more money. That means the state has to stop seeing “economic recovery” as a dirty word and instead see it as their primary obligation. Government policy needs to be oriented toward building sustainable prosperity, as that’s the best way to bring down the projected deficits in the pension system.

CalPERS, for its part, should start investing in sustainable projects. One specific thing they could do is invest money in our high speed rail project, and be repaid out of some of the operating surpluses from the trains. Arnold Schwarzenegger currently envisions private investors playing that role, but why should HSR operating surpluses go them? Wouldn’t it make sense to instead plow that back into the state’s pension needs? And can’t that model be expanded to solar and wind power generation?

The $100 billion figure for retiree health care obligations is easily dealt with by creating a universal single-payer health care system. SB 810 would save billions for state and local governments, and its overall cost in California would not be $100 billion. It would then be possible to find a way to use the single-payer system as a substitute for the retiree health care obligation.

California should also explore chartering its own bank in order to deal with its ongoing debt obligations. It’s possible that the bank could be used to refinance existing debt at lower rates and avoid being held hostage by private investors.

Ultimately, of course, California is going to have to pay for its services by higher taxes. Our 30-year experiment in low taxes and high services has catastrophically failed, as the institutions our state needs to thrive are being destroyed as we speak. Higher taxes on the wealthy and on corporations would help right the fiscal ship, help give us a cushion to deal with the debt we do have, and enable us to escape the downward spiral we’re mired in.

A state government, even one facing a serious financial and economic mess, still has a number of tools, resources, and funds to use to get us out by restoring economic prosperity and reorienting us away from unsustainable ways of life and toward something more sustainable and sensible.

Of course, we shouldn’t be in this alone. Just as Abu Dhabi may help Dubai restructure its debt, the US government still has many things it can do to help California move away from a dangerous debt dependence and toward sustainability. There’s no reason California should have to do this by ourselves, especially when national economic recovery depends on Californian economic recovery.