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Luis Arenzana

Back to School, Back to Reality

«It has been a shock to us from day one how easily western democracies suspended civil rights because of this emergency by legal or extra-legal means. The damage to civil rights and legal security may be irreparable»

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Back to School, Back to Reality
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Many of us will soon face changes in the beginning of the new school year. This academic year will be different for most of us. Chances are that slowly but surely, we will go back to our old routines. Commuting, going into the office regularly, meeting clients and colleagues face to face, getting most meals outside the home, going on business trips, or going to the gym are making a comeback. Some people are enamoured with the working from home culture and dread the old mores. Others cannot wait to retake their former lifestyles. Most would like to be able to choose what they like best about each of these two lifestyles. Certainly, the past eighteen months have triggered many changes and very likely an acceleration of many trends that were lurking in the background. We shall soon see the resilience of some of the new habits and whether we retake some of the old habits.

Our takeaway from these troubled times is definitely quite negative. It has been a shock to us from day one how easily western democracies suspended civil rights because of this emergency by legal or extra-legal means. The damage to civil rights and legal security may be irreparable. The Constitutional Court in Spain recently ruled that the limitations on movement imposed on citizens in 2020 are not constitutional and yet not a single politician has resigned or even shown a smidgeon of remorse for their decisions.

This new form of utilitarianism, whereby the end justifies the means whether a majority is better off, will soon encroach on other rights. Today, there is widespread consensus among politicians, from China to the US, that inequality is the source of most social ills and political problems. XiWMBO’s government has decided that private tutors are a source of inequality, because their pupils gain an unfair advantage to access State Universities when compared to students that cannot afford the tuition fees. Rather than introducing financial aid programs or scholarships for lower income students, the Chinese government has declared that the large online education companies should become non-for profit organizations. How this expropriation solves the problem of inequality of opportunity remains unclear. Other much larger companies, which were until quite recently pampered and well-protected national champions, have also become the targets of regulatory ire. They are perhaps too large and too powerful.  Thus, the contrite managers of some of these companies are “voluntarily” disbursing billions to social programs.  This is quite a shock to their foreign investors who would have expected the founders to make these donations, as is the case in the US.

Optimists will say that platforms such as Google, Facebook, Apple or Amazon are also targets of the Brandeis inspired trustbusters appointed by President Biden to the Federal Trade Commission.  Margrethe Vestager, the Orwellianly titled Executive Vice President of the European Commissioner for “A Europe Fit for the Digital Age Competition”, has been fining the US companies for years for a myriad transgressions of EU competition laws. Why are the stocks of these Chinese tech companies trading so poorly, if in the end, the new regulation on data privacy was widely anticipated and is hardly harmful to their profits? For one thing, the especially harsh treatment imposed on the educational companies does not sit well with most investors, it was a wakeup call for many latecomers to the vagaries of the rule of law in China and there was probably still too much leverage and complacency even following the defenestration of the Archegos fund.

In China, the role of the Government sector and the services it provides is very different from what you may think offhand.  As the leadership celebrates the centenary of the Chinese Communist Party, 30% of the population has no medical insurance coverage (vs. 11 in the US). The average monthly unemployment insurance payment is $230. Conversely, tuition fees at public universities range from $2,500 to $10,000 annually, which is much more than most families can afford. While financial aid is increasingly more available, it is far from universal. Finally, the two tiered public pension system comprises a basic pension that pays 1% of the average of the indexed individual wage and the province wide average earnings, employer funded defined contributions into individual accounts. A third tier comprising employee contributions is under study.  Apparently, these public sector pensions are not very generous either. Because of the shortcomings of the services provided by the Government, Chinese households have a very high savings rate, as they need to provide or top up healthcare, education, and pension expenses. It is a good idea to keep these factors in mind before falling in love with the brutal efficacy of the Chinese political system or that of any other totalitarian political regime.

In any case, legislatures and governments the world over, and not just in Communist China, are designing redistribution policies that for the most part will take the shape of the confiscation of wealth. The tax revenues from this source will be a drop in the ever-growing bucket of public expenditures but the political gain is deemed enormous.  We can think of some better schemes achieving redistribution through taxes.  Rather than taxing wealth, which is in most cases mobile, and which additionally can be easily protected through legal tax strategies, perhaps policymakers should think of taxing other items. Taxing conspicuous consumption and means testing public pensions and even perhaps healthcare benefits come to mind.

Does it make sense to re-introduce luxury taxes?  In other words, should the sales tax and VAT become progressive taxes? The Commonwealth of Massachusetts has a reputation for high taxes but when we lived there in the 1980s, apparel was exempted from sales tax up to a generous $500 dollars allowance per item. Is it fair to charge a higher sales tax rate for a pair of $1,000 Manolos than that of a pair of $30 Crocks? Perhaps automobiles that cost $100,000 should be assessed a higher sales tax rate than a second hand clunker that goes for $2,000. Further, it is probably a good idea to means text social security benefits. Taken in isolation from other taxes paid and benefits received, it is fair to say that only those who die relatively young make a contribution large enough to cover their pension and that of their surviving espouse. Thus, it is not as if the Government would be expropriating private property if benefits were to run out after the contributions are depleted for the most affluent beneficiaries, wouldn’t it?

Demonstrably, it is far easier to tax real estate than any other asset.  This argument is self-explanatory for Spanish speakers as real estate is called unmovable property while securities are categorized as movable property. In fact, the United Kingdom already introduced a progressive Stamp Duty on real estate transactions whereby transactions under 250k are exempted, the excess up o 675k is taxed at 5%; the next 575k are taxed at 10%, and the remaining excess amount at 12%. The PM is studying a new Mansion Tax that would introduce a 1% annual property tax on the excess assessment over GBP 2 million.  New York City introduced a progressive mansion tax and a new transfer tax on properties valued above $2 million.  These taxes will become universal as they are easy to collect and easy to defend.

Unfortunately, there is no discussion on reducing the size of government. The Pandemic revealed the inadequacies of the public health system to deal with a surge of hospital admittances, yet not a single person suggests it would be best to privatize the health system. On the contrary, the consensus emerging from this often-mismanaged long crisis is to increase funding for the government health system. This is not unlike the ballooning on intelligence and military budgets following 9/11.  We are afraid that the expansion of the public health system that is unanimously applauded today will result in a similar success for the industry that sells related products and services to the Government but very unlikely will become a resounding victory over annoying new pandemics.

As children venture back into their classrooms in Spain, they will be required to wear facemasks both indoors and outdoors. Science has just published an authoritative paper on “Airborne transmission of respiratory viruses” (https://science.sciencemag.org/content/373/6558/eabd9149).  The authors conclude:

“Airborne transmission of pathogens has been vastly underappreciated, mostly because of an insufficient understanding about the airborne behavior of aerosols and at least partially because of the misattribution of anecdotal observations. Given the lack of evidence for droplet and fomite transmission and the increasingly strong evidence for aerosols in transmitting numerous respiratory viruses, we must acknowledge that airborne transmission is much more prevalent than previously recognized. Given all that we have learned about SARS-CoV-2 infection, the aerosol transmission pathway needs to be reevaluated for all respiratory infectious diseases. Additional precautionary measures must be implemented for mitigating aerosol transmission at both short and long ranges, with particular attention to ventilation, airflows, air filtration, UV disinfection, and mask fit. These interventions are critical tools for ending the current pandemic and preventing future outbreaks.”

It would be perhaps too much to ask that the possibly imaginary scientific advisors to the Spanish Government become familiarized with the state of the art on the transmission mechanisms of infectious diseases before delivering their newest batch of impositions and recommendations.  Undoubtedly, far more attention needs to be paid to factors such as ventilation, airflows, and UV disinfection.  The first two mitigating factors have been discussed ad nauseam by public health officials.  While landlords and tenants have refitted many office buildings to treat and disinfect airflows, we are afraid not much has been done in schools, especially in public schools. As for UV disinfection, we have yet to meet anybody who has a UV device for home or outside use.  While mask use is widespread in Spain, both indoors and outdoors, most people wear their mask too loosely. While the police can fine motorists for not wearing their motorcycle helmets properly fastened, we have yet to see anybody reprimanded for wearing a loose fitting mask. Most of us want to get on with our lives, let us hope that Government experts are better at communicating the facts going forward.

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