Cool, so the problem stems from the lack of perfect substitutability – not from the fact that “savings are now too low”. As a result, government policy should be focused on improving workforce training and helping the macroeconomic adjustment along – rather than trying to prevent it happening.

Because we can’t instantly switch everyone from producing consumption goods to capital goods, and if we try the result is a lot of intermediate unemployment. That’s the result we get if everyone tries to raise their savings level at the same time.

The government should help improve the speed with which resources are allocated to minimise the pain – it shouldn’t try to stop a structural adjustment.

There is also no guarantee that government actions to change the path would be optimal. Furthermore – if the government isn’t willing to let us move to an equilibrium with higher savings now, is there an assurance they ever will?

Ultimately, if households have realised that there expectations are out of whack and are responding then why is it optimal for the government to spend money now and then tax people more in the future?