Known Unknowns

Hello,

Welcome to Known Unknowns, a newsletter where there’s no free lunch or retroactive taxes.

What to do about schools

There was extraordinary coverage of an extraordinary study this week. JAMA published an article that estimates COVID-19 has similar death rates as the 1918 flu. What’s extraordinary about the coverage of the article is that it fails to mention the fact that the 1918 flu mostly killed people under 30, while COVID-19 kills mostly people over 70 – and the fact it does not merit any mention says a lot about how our current society and how we value life (or some lives, we tend to be indifferent when it comes to poor people in other countries--but I digress).

Some of that has to do with the fact we are richer, and the more money you have, the less risk you have to take. In 1918, we couldn’t have printed tons of money to pay people to stay at home. We also didn’t have the technology to make it workable. Back then, people had to make harder choices and weigh trade-offs in ways we don’t today. It is a miracle of the modern world we can value life the way we do.

But that doesn’t mean there aren’t still trade-offs that need to be considered. This whole debate around schools has been fascinating and horrifying to watch (my article also appeared in the New York Post; appearing in New York tabloids is always thrilling for me). I seem to recall that, back in June, everyone agreed we had to reopen schools as soon as possible. Then it got political and the virus spread. Now meaningful school opening looks unlikely in many places, even in states with low infection rates like New York City and New Jersey. There is actually no correlation between infection rates and school openings, which suggests the science is not driving decisions most anywhere.

There are risks for sure, even in low-infection states. But I keep hearing people say we must delay education until it is safe. I am not sure what that means. As a financial economist, you have to define risk-free. Is “safe” until there’s a vaccine that everyone has, better testing, more school nurses, better protocols, or has our definition of “safe” changed and must now clear a higher bar? A bad flu is deadlier for children (though not people well above 40). Will it become the norm to shut down schools every bad flu season?

All life is precious, so maybe. But we need to be clear on what we’re giving up. Based on school closures in the past, missing a year of school means 9% to 16% lower earnings for 40 years of your career. The biggest earnings losses are among children of less-educated parents. I reckon it will even be more severe now, since highly educated parents will find ways to make sure their children don’t miss out. They will form pods, move to where school is offered, or just homeschool. It is also important to realize that school isn’t just about education; it also provides socialization and trains us to listen to directions, delay gratification, and take instruction. All critical skills.

I fear we are sowing the seeds of profound inequality that will last a generation. Despite technology and more wealth, we really have not escaped trade-offs and risks.


Sigh, California

Despite these challenges, never underestimate our ability to make the worst possible choices. I can’t get over how different New York is. We now tolerate low levels of assault or harassment but shutdown bars that serve popcorn with beer. I wonder how we can thrive when we harass businesses and degrade quality of life. But not to be outdone, things appear worse elsewhere.

A California judge ruled that ride-share apps, e.g., Lyft and Uber, must treat their contract workers as employees. This may be the correct interpretation of AB5 that passed last year­ – but it’s a terrible law. First, it makes labor more expensive, which is unwise in the midst of a recession (Uber is now threatening to suspend operations in California as a result). Second, many of these contract workers don’t want to be employees. They prize flexibility because many do the work as a side hustle or to accommodate childcare (valuable now with irregular schooling). Doing some gig work also keeps people active in the labor force, which can spare them from falling into long-term unemployment. I understand being an employee sounds safer, but if you do gig work as insurance, it really isn’t.

California is also considering a wealth tax. Considering it is already having a problem with people leaving for low-tax states, it seems unwise, especially now that remote work is more popular, especially with techies. I read the plan by the economists, which suggests the tax applies even if you move to another state, It is based on the idea you owe tax on any wealth you earned in the state. So even if you move you owe California because your wealth was earned there (or you just spent it their for a while). Isn’t that just an enormous retroactive income tax? Why would anyone ever take their wealth to California after that?

Sweatpants are the new black

Believe it or not, in spite of all this, I am somewhat optimistic about the future. To some extent, we are seeing the speeding-up of long-term structural changes, which is a typically messy and destabilizing process. The future is like the past; however, in the end we’ll be somewhere better with higher living standards.

I suggest you read this story in the New York Times on the business of fashion. The story explains how commerce has changed, but somehow the fashion industry got into a bad equilibrium with clothes people did not want, overproduction, and wasteful travel. The pandemic world is expected to change all of that. It will probably mean lost jobs and major restructuring – and some fashion lines may fail (some I probably love, too). But the end result will probably be something less-wasteful, higher-quality, and more in line with what customers want.

I hope that’s where we are going, even if it is bumpy getting there. In many ways the pandemic is speeding up an already difficult transition. We may emerge more productive.

In other news

Some thoughts on immigration

Until next time, Pension Geeks!

Allison