Savings Policy and the Paradox of Thrift

The debate among legal scholars about individuals’ failure to save enough for retirement adopts a “micro” perspective. It focuses on the causes and consequences of undersaving from the perspective of individuals and analyzes how legal interventions, such as tax subsidies and nudges, can best address individual saving mistakes. This debate depends on certain assumptions about how the macroeconomy operates. When these assumptions do not hold, neither do the implications of the micro analysis, turning the conventional analysis of undersaving on its head. In fact, in certain circumstances, saving imposes a negative externality. When this is true, what looks like undersaving at the individual level may constitute oversaving in the aggregate, and the private vice of overconsumption may in fact be a public virtue—the “paradox of thrift.” We adopt a macro perspective and argue for reforms of legal interventions designed to increase savings.