As Political Power Shifts, So Do Prospects for the Region's Economy

Baltimore Mayor Martin O'Malley, right, Maryland's governor-elect, with Anthony G. Brown, the lieutenant governor-elect. O'Malley and his Virginia counterpart, Timothy M. Kaine, are Democrats. (By Linda Davidson -- The Washington Post)

Yeah, but is it good for the Washington economy?

The "it," of course, is the result of this week's elections, which not only turned Capitol Hill over to the Democrats and swept Republicans out of power in Annapolis but also ushered in new chief executives in the District and Montgomery County.

The short answer to the question is that it's probably not so good for business and economic growth in the short run, but it sets the political table for correcting the region's biggest economic problems and creates the conditions for sustained growth over the long term.

Let's consider the pluses and minuses.

The big negative is that the government-contracting gravy train, which the regional economy has been riding for the past four years, just jumped the tracks. It's not only that the war in Iraq will start to wind down, along with all the logistical support and reconstruction work that goes with it. Even more significantly, the Democratic Congress is about to lift the veil on the orgy of contractor waste, fraud and abuse that has gone unchecked at the Pentagon, the intelligence agencies and the Homeland Security Department.

The process of de-Halliburtonization will lead to a cutback in defense and homeland security contracting, a squeeze on contractor profits, a hit to share prices and a noticeable deceleration in wage increases for key employees. All of these will have a noticeable negative impact on the regional economy, particularly in Northern Virginia, which has once again become dangerously dependent on government contracting.

Maryland has a different problem. The promise of biotech has long stoked economic development fantasies in Montgomery County. The economics of biotech assumes high prices for products to compensate for the expense and uncertainty of the development and approval processes. But Democrats are now promising to push down those prices by having the government negotiate drug prices for Medicare recipients, which would have the indirect effect of lowering prices for just about everyone else. Until the pricing issue is clarified, it is likely to have a dampening effect on the pace of biotech investment, which is right now what drives the industry.

On the plus side is immigration reform. Washington has become a magnet for immigrants who have been a big factor in the region's growth, as workers, consumers and especially as entrepreneurs. It is important to the region to sustain a modest flow of new immigrants, while legitimizing the status of those who are here illegally. And that is likely to happen if, as many believe, President Bush and the Democratic leadership use the immigrant bill as their beta test of bipartisan cooperation.

The change of control in Congress will also force corporations and industry associations to spend time and money getting to know a new set of power brokers, and responding to the new agenda set by the Democratic committee chairman. That no doubt will mean bigger budgets for government relations and more trips to the nation's capital, which is good news for downtown hotels, high-end restaurants and K Street lobbyists.

For the last three years, a legislative cloud has hung over Fannie Mae and Freddie Mac, two of the region's largest employers, as Congress and the administration debated how big they should be, what their businesses should be and how they should be regulated. The shuffling on Capitol Hill, along with recent changes at the top of Treasury and the Federal Reserve, offer hope that these issues can finally be resolved.

On the other hand, Democrats have an interest in expanding the college loan program and shifting more of it from private lenders to government. It didn't take investors long to figure out that that's not good news for Reston-based Sallie Mae, which originates, buys and services those private-sector loans. SLM shares fell 6 percent over the past two days.

Tote it all up -- and factor in the slowdown of the national economy and the collapse of the homebuilding industry -- and 2007 looks to be the year that the Washington economy falls back to earth.