• Your Windows build number: (Type ver at a Windows Command Prompt)
  Microsoft Windows [Version 10.0.18922.1000]

• What you're doing and what's happening: (Copy&paste the full set of specific command-line steps necessary to reproduce the behavior, and their output. Include screen shots if that helps demonstrate the problem.)

Trying to increase max_user_watches according to vs-code instructions.
Edit /etc/sysctl.conf, then apply values with sudo sysctl -p
Reboot, reopen vs-code, get same error.
cat /proc/sys/fs/inotify/max_user_watches --> 8192, not the 524288 value listed in sysctl.conf
actually apply the sysctl values manually: sudo sysctl -p
cat /proc/sys/fs/inotify/max_user_watches --> 524288

• What's wrong / what should be happening instead:
  some process in /init should be applying sysctl values from /etc/sysctl.conf, but that isn't happening.

• workaround:
  add sudo sysctl -p to .bashrc or similar. Not ideal, not guaranteed to be triggered unless a bash process is started.