way." The declining cost of fiber-optics transmission and the progress driving microprocessor technology (at a rate commensurate with Moore's Law) led some to predict that communications bandwidth would soon be virtually free.2 Households, businesses, and every profession from physi- cians to teachers would be able to send and receive high-speed video images that would substitute for personal diagnoses, provide remote monitoring, allow remote tutoring, and supply personalized access to entertainment. Once the telecommunications sector was opened to competition and de- regulated, innovation could flourish, thereby allowing subscribers access to new services and providing existing services at dramatically lower prices. The First Eight Years under the New Law The Investment Boom Unfortunately, as explained earlier, the 1996 act did not deregulate tele- communications. Instead it created a vast new system of wholesale-price regulation that was only vaguely spelled out in the statute. Incumbents' local telecommunications services, in particular, would continue to be in- tensely regulated by the states and the Federal Communications Commis- sion (FCC). By contrast, long-distance and wireless services had been more or less deregulated before the act was passed, SO both sectors had already begun to invest heavily in infrastructure in the early 1990s. The lure of the Internet would entice them to accelerate this investment after 1996. In addition, new local carriers sprouted from everywhere and were able to attract enormous amounts of capital. The result was an investment boom that continued for more than five years. Between 1987 and 1996, nominal capital spending increased at an aver- age rate of 4.8 percent a year (figure 3-1). 3 In the next four years, it soared to more than 20 percent a year. By 2000 real capital spending had risen 148 percent from its 1996 level. This surge was accompanied by an even greater rise in the price of telecom equities. In 2000-01 this stock market "bubble" burst (figure 3-2). 4 The new loc