The August jobs report should put to rest any fears that the economy is burning out. Following upwardly revised increases for June (134,000) and July (121,000), companies added 128,000 nonfarm payrolls last month. Meanwhile, the all-important but rarely mentioned household survey of people working gained by 250,000, sending the unemployment rate back to 4.7 percent from the July reading of 4.8 percent.

The cult of the bear, fussing about a housing-related recession, has once more been proven wrong.

When you step back from the short-term ups and downs of the monthly data, what you see is a return to normal jobs growth. This follows a brief lull earlier in the decade, caused by a shallow recession and a series of adverse economic shocks: a tech bubble that popped, terrorist bombings, war, and an unusual spate of corporate malfeasance.

Long-term jobs growth has moved to an all-time high of 145 million in the household survey and 136 million in nonfarm payrolls. Both measures are rising at about 1.5 percent, the average for jobs growth dating back to 1995. As for unemployment, at 4.7 percent it is well below the 5.1 percent long-run rate.

This suggests we are near full employment and that the economy is operating close to its full potential to grow. It’s still the greatest story never told.

In a speech last week, Federal Reserve chair Ben Bernanke was bullish on the outlook for productivity, a vital economic stimulant. He cited rapid technological advances as a key driver in the new economy, noting that productivity gains have spread from information technology to other major sectors such as retail, financial services, and manufacturing -- all heavy users of technology.

Nonfarm productivity has increased an average 2.5 percent annually for ten years. Labor force participation has been growing slightly better than 1 percent annually. Putting the two together, you get a 3.5 percent rate of potential economic growth. The latest GDP report shows 3.6 percent growth over the past year, down slightly from the near 4 percent pace of the past three years.

Bernanke also noted that while Japan and Europe have access to the same technology we do, they have grown at a much slower pace. The principal reason for the gap? Economic policy. Bernanke outlined the U.S. edge in terms of deregulated labor markets, greater competition, lower barriers to entry for new firms, more sophisticated capital markets, and the enlarged role of research universities in fostering economic-empowering innovations.

A serious omission from Bernanke’s list, however, was tax policy. Total marginal tax rates for the U.S. workforce are substantially lower than in Europe and Japan. In particular, the 15 percent tax rate on investment (capital gains and dividends) put in place by President Bush (following President Clinton’s cap-gains tax cut from 28 percent to 20 percent) has given tremendous torque to productivity, job creation, and economic growth.

Capital formation is the key to worker productivity and consumer prosperity. Visionary entrepreneurs, those who discover new technologies or innovate those that exist, must be financed with capital. In the longer term, capital-induced productivity increases lead to greater wage gains and enhanced consumer spending power. Continued...