Comments and Discussion.

This article comments on the article "Assessing the Federal Reserve's Measures of Capacity and Utilization," by Matthew Shapiro in U.S. industry. From a broader perspective, Shapiro is unconvincing in making his case that the Federal Reserve "should avoid giving a structural interpretation to high capacity utilization." As you shall see, Shapiro steps into the fatal pitfall of confusing changes in absolute prices, which the Federal Reserve should care about, with changes in relative prices, about which it should not. The main problem with the measurement part of Shapiro's paper is that he does not make an adequate distinction between measurement issues and conceptual issues, as he could have by examining more closely industries with good measures of physical output and capacity. In such industries, it becomes clear that, even when the measurement issues are completely absent, it is impossible to interpret a given level of a utilization index as indicating a given degree of "tightness." Shapiro's central policy objective is to evaluate the conventional view that "if capacity constrains real output growth, inflation must increase."