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The Next Four Years


Brushing off a sputtering Iraq War, an economy struggling to create jobs, and a hard-hitting challenge from John Kerry, George W. Bush roared to a convincing victory on Nov. 2, besting his Democratic rival 51% to 48% and paving the way for four more years of conservative Republican rule. Although Democrats took pains to nominate an Establishment contender and decorated Vietnam War vet, and Kerry reprised some of Bill Clinton's New Democratic doctrine, Bush's answer was simplicity itself:

He drowned out Kerry's middle-class economic message by making terrorism and national security the dominant motifs of the race; then he undermined his foe's credibility by painting him as an ultraliberal flip-flopper who would hasten the day when terrorists would again rain havoc on America.

The fight was brutal, yet Bush prevailed by a surprisingly large margin. The President anchored his win by capturing the big swing states of Florida and Ohio, the bedrock of his 2000 victory. As BusinessWeek went to press, he seemed assured of 279 electoral votes, while Kerry had wrapped up 252. An additional seven were too close to call.

NEW VOTERS ON BOTH SIDES

Democrats hoped to carry the day with a registration drive of epic proportions. But Republicans neutralized that blitz with a grassroots surge of their own. Key demographic blocs targeted by the White House, including evangelical Christians, married women, and Hispanics upped their backing of Bush from 2000 -- gains that offset declining support from moderates, independents, and young voters.

To appreciate Bush's achievement, consider the obstacles in his path: Despite four tax cuts, the pre-election economy was 940,000 jobs short of recovering from the losses of the 2001 recession. Sky-high oil prices are sapping growth, and consumer confidence declined in the final four months leading up to the election. The Dow Jones industrial average meandered all year, stuck near 10,000. And analysts scored a hyperkinetic Bush 0 for 3 in the fall debates against a confident, Presidential-looking Kerry.

As for Iraq, the President's defining metaphor for leadership, the U.S.-led occupation looms as a disastrous counterpoint to the 3 1/2-week blitz that toppled Saddam Hussein's forces. After more than 1,100 U.S. casualties, what Americans mainly have to show for Operation Iraq Inc. is a seething Iraqi insurrection, uncertain prospects for free elections, and allies who are buckling under the threat of kidnappings and murders.

Bush's clear-cut victory puts him in a strong position to push ahead with the next leg of his ambitious conservative agenda. But given the deep divisions rending the nation, it would be a stretch to interpret his triumph as an overwhelming endorsement of anything concrete -- much less "stay the course" entreaties on Iraq, a deficit-be-damned drive for more tax cuts, or a dimly perceived "Ownership Society" that proposes partial privatization of Social Security and aims to replace the employer-based health-insurance system. Hemmed in by hostile Democrats, a busted piggybank, and a lack of national consensus on his conservative reforms, Bush faces tough struggles on Capitol Hill.

What the President mainly won on Election Day, experts say, is a chance to revise the script of 2000, when he ignored a contested victory to govern more from the conservative than the compassionate end of the spectrum. He also gained an opportunity to reach across party lines and bind the nation's wounds. "The country remains clearly divided," says Richard M. Kovacevich, chairman and CEO of Wells Fargo & Co. (WFC). His hope is that "President Bush would decide to bring the country together and be President of all the people."

FULL SPEED AHEAD

Will Bush seize the moment, morphing from partisan to conciliator? Not likely, longtime Bush-watchers suspect. While the President may mute some base-stoking rhetoric for a while, when Congress convenes in January he's expected to dig in his spurs and charge. That means pushing ahead with a troubled Iraq venture, possibly upping the ante in a showdown with Iran, kicking off a sweeping drive for free-market reforms of domestic programs, and -- given the chance -- naming conservative anti-abortion jurists to the Supreme Court.

"If Bush were like Thomas Jefferson -- which he is not -- he would issue a statesmanlike call for reconciliation," says Rutgers University political scientist Ross K. Baker. "Instead he'll interpret his win as a strong sign of support for things like private Social Security accounts."

Exactly, say exultant Bushies. "We need to charge out of the box with a mandate to be bold," says policy director Tim Adams. By snaring five Democratic Senate races in the South and upending Senate Minority Leader Tom Daschle in South Dakota, the GOP padded its Senate margin by four. Such a psychological blow can be useful. Says ex-White House economist Lawrence B. Lindsey: "Some Democrats will probably rethink whether obstruction is the best strategy."

But for economic and political reasons, the crucial first year of a new Bush term will differ from the Texan's 2001 storming of Washington. Then, Bush dominated the debate with two splashy domestic goals: stimulative tax cuts and bipartisan education reform. With a projected 10-year surplus of more than $5.6 trillion, he had plenty of cash to use and made rapid headway on his agenda. The September 11 terror strikes only added to his stature. Bush used his new clout to ram tax cuts and more tax cuts through Congress.

In 2005, Bush will commence Act II after running a campaign that downplayed home-front concerns to revolve around his wartime vision. Many voters have only the vaguest idea of what his domestic program looks like. That, plus the prospect of piling up $3 trillion in deficits and growing distress with Bush's fiscal stewardship gives the President less running room to push for his wish list.

Typically, though, that list does not lack for ambition -- and the price tag could be huge. Among the priorities: a costly experiment with private Social Security accounts, a $2 trillion plan to make previously enacted tax cuts permanent, a difficult tax-simplification drive, expanding the No Child Left Behind Act to high school kids, reviving a stalled energy plan, tort reform, and, oh yes -- a pledge to cut the deficit in half.

Some business leaders wonder if all this is achievable and whether the priorities are right. "Personally," says Edward M. Liddy, chief executive of Allstate Corp.than reforming Social Security." Adds R. Jarrett Lilien, president and chief operating officer of E*Trade Financial Corp. (ET): "The deficit is a serious issue, and I don't know whether cuts in spending or tax increases" are needed.

SUPREME COURT STRUGGLE

No one, of course, is selling a leader as determined as George W. short. But in reality, a reelected Bush could be slowed by his own personal energy crisis. He'll be preoccupied by Iraq and constrained on the domestic front, his maneuvering room limited by budget shortfalls and threats of Democratic trench warfare. "Some of Bush's first-term success was due to Democrats' willingness to work with him," notes Marshall Wittmann, a senior fellow at the centrist Democratic Leadership Council. "Next year, Democrats are going to be ornery, and they'll stay ornery for a long time."

An immediate trigger for Capitol Hill chaos could come over the Supreme Court. With Chief Justice William Rehnquist ailing and several of his colleagues likely to retire soon, Bush could soon walk into a national brawl over the judiciary. Democrats would go to the mat in a fight to preserve Roe v. Wade, affirmative action, and other liberal touchstones -- which is why some business leaders are hoping against hope for calm on the kulturkampf front. "I hope cooler heads prevail," says James R. Houghton, CEO of Corning Inc. "It would be very divisive to see Roe v. Wade overturned."

A poisonous court fight could shatter the consensus on key pieces of legislation. Says Michael Franc, chief legislative analyst at the conservative Heritage Foundation: "A lot of political capital will be consumed. And it will displace other issues for an extended period of time."

Even if Bush sidesteps a nasty judicial spat, when it comes to the rest of his agenda, he's raring to hit the ground running. The President's inclination, aides say, is to ignore political and budgetary impediments and seek cosmic fixes for monumental problems. So he'll plunge ahead on the goal of making his tax cuts permanent and will challenge Congress to revamp Social Security by approving personal investment accounts. Bush also is intrigued by the notion of restructuring the tax code, an idea that's both big and controversial. It's a hefty load. Says a lobbyist with ties to the White House: "Bush can't do all three; he probably can't do two."

Business reps expect one of the first bills Bush sends to Congress to be one seeking to make the 2001 and 2003 tax cuts permanent. True, those rate reductions and capital-gains and dividend cuts don't expire until '08 and '10. And even some tax-cut activists, such as Grover G. Norquist, president of Americans for Tax Reform, wonder why there's a rush. But Bush considers the tax cuts a legacy to preserve. Other GOP pols, looking to the 2006 midterms, want to force Senate Democrats into casting no-on-tax-cuts votes in lockstep opposition. While GOP moderates blanch at the cost, odds of passage in a GOP Congress are decent. Says Joe M. Allbaugh, Bush's campaign chief of staff in 2000: "The President will put every bit of personal capital he has into making those tax cuts permanent."

Next up will be a bid for Social Security revisions. Republicans think redirecting some payroll taxes into worker-held investment accounts can raise the retirement system's puny returns. Wall Street will throw its own lobbying clout behind the plan, which would mean new funds for the stock market -- and a bonanza for money managers.

But first the White House will have to decide what restructuring should look like. How big should the accounts be? Proposals for a carve-out range from 2 to 6 points of the 12.4% Social Security payroll tax. Another key decision: Will younger workers who use private accounts be required to accept smaller benefit checks to offset the cost?

The biggest quandary is funding the transition. The problem is, the existing system is pay-as-you-go, so current workers' payroll taxes fund their retired parents' benefits. If workers divert taxes into private accounts, where will the money come from to pay for tomorrow's elderly? The gap: up to $2 trillion over a decade.

The Bush crew, which won't raise taxes, seems to have settled on some form of borrowing to cover the cost. But adding $200 billion a year to the feds' hefty financing needs may not sit well with the bond market. And that illustrates Bush's toughest task: persuading Republicans to sign on to a plan that can easily be skewered by Dems. "The President strongly believes in this," says ex-Congressional Budget Office Director Rudolph G. Penner. "But it will be extremely difficult."

TAKING ON THE TAX CODE

Most politicians facing fights as tough as preserving tax cuts and overhauling Social Security would call it quits right there. Not Bush. He will take a page from Ronald Reagan's playbook by creating a blue-ribbon panel to explore simplifying the tax code and rendering it more conducive to savings and investment. Under consideration: everything from a consumption-based income tax to a Reagan-style effort to cut loopholes and cut rates.

Many Republicans, including House Majority Leader Tom DeLay (R-Tex.), want to replace the revenue code with a national sales levy. Others support a flat tax that would set a single rate on all income. But those proposals are already generating business opposition. Retailers and small businesses worry that a big new sales tax would chill consumers. And corporations, many of which pay little or no tax, are not enthusiastic. In the end Bush may get only small-scale changes. In the balkanized atmosphere of Washington, "it's tough to come up with a big policy that has any chance of enactment," says former GOP Representative Vin Weber.

If he wants to be more incremental, Bush will have another vehicle to push tax reform -- a patch for the Alternative Minimum Tax. The AMT is a backup tax system that hits 3 million mostly middle-class families by eliminating deductions for state and local taxes and for children. Unless it's fixed, it will hammer 30 million taxpayers by 2010.

In recent years Bush and Congress have agreed to stopgap repairs. But the price tag is exploding, and a long-term fix would cost at least $600 billion over a decade. Now lawmakers may be forced to tackle broad-based reforms -- or face the ire of millions of middle-class taxpayers.

That will eat a lot of cash, and looming over Bush's ambitious agenda is a huge budget deficit. He vows to cut the red ink to $250 billion in five years. But the Iraq war, the AMT fix, recently enacted corporate tax cuts, and any bid to make tax cuts permanent may make that nearly impossible. "Bush's budget numbers just don't add up," says William C. Dudley, chief economist at Goldman, Sachs & Co. Bush will face a backlash next year from Democrats and even some Republicans worried about the deficit. Lawmakers such as Senator John McCain (R-Ariz.) are outraged by the growth of Big Government, and Bush aides worry that he risks an intraparty fissure if he doesn't rein in spending. Bush also badly needs to jump-start the stalled Doha Round of global trade liberalization, somehow finessing a North-South spat over farm subsidies. Holders of copyrights, such as the entertainment biz, software makers, and pharmaceutical giants have a huge stake in moving the talks off dead center. But corporate lobbyists worry that the trade round could become a casualty of Bush's obsession with the Iraqi endgame.

While his path is strewn with obstacles, not everything is out of reach. Lobbyists suspect that the threat of oil hovering around $50 a barrel may finally produce action on the Administration's stalled energy bill. "If we start over and de-pork this thing, we could have a bill soon," says one corporate rep. In a similar vein, Bush's plan to extend the accountability provisions of the No Child Left Behind Act could be settled the old-fashioned way -- by buying off Democrats with an injection of spending.

With money scarce, Dems digging in, and Iraq a powder keg, the next four years look perilous for the triumphant President. But few expect Bush to flinch. "With any other President, I'd expect caution," says Bruce Buchanan, a government professor at the University of Texas at Austin. "With Bush I don't think there's any question: He'll go for broke."

The question for Americans struggling to absorb the message of Election 2004 is this: Will a headlong bull rush -- which served Bush splendidly in the tax fight and failed him in Iraq -- produce an agenda that somehow melds the disparate dreams of a deeply divided nation? Or will his second term, like that of many Presidents before him, end in a heap of grand ambitions gone awry?

By Lee Walczak, Howard Gleckman, and Rich Miller, with Richard S. Dunham and Paul Magnusson, in Washington, and bureau reports


Steve Ballmer, Power Forward
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