Nov. 4 (Bloomberg) -- President George W. Bush, re-elected by the narrowest popular-vote margin for an incumbent since Woodrow Wilson in 1916, may pursue an agenda worthy of a landslide winner.

Bush's victory over Senator John Kerry probably will mean he'll escalate the war in Iraq to try to defeat insurgents and ensure that elections are held as scheduled in January.

Aided by expanded Republican control of Congress, he'll try to carve out private retirement accounts from Social Security, open up more U.S. lands to oil drilling and make permanent his $1.85 trillion in tax cuts, undeterred by record deficits.

``The people made it clear what they wanted,'' Bush told a news conference today. ``It's like earning capital. I earned capital in the campaign -- political capital -- and now I intend to spend it.''

Bush made the election a referendum on his leadership, touting the decision to go to war and lead the fight against terrorism as evidence of his character and determination.

``The war was important to the voters, and they saw him as decisive and committed and unwavering,'' says Dick Armey, the former Republican majority leader in the House of Representatives. ``They had reservations about whether Kerry would see it through. None of the other domestic policy issues really matter in this election.''

War, Tax Cuts

During his first term, Bush overcame Democrats' misgivings and invaded Iraq, enacted the biggest tax cuts since Ronald Reagan's administration and instituted the first prescription- drug benefit for the elderly. And that was after he lost the popular vote in 2000 to Democrat Al Gore, winning the presidential race only after the Supreme Court ordered Florida to halt a ballot recount after 36 days.

``Whether he wins by one vote or a million votes, he clearly will push for what he wants,'' says Stephen Hess, a scholar at the Washington-based Brookings Institution.

Bush, 58, and Vice President Dick Cheney, 63, received 58 million votes, or 51 percent of the national popular vote, becoming the first candidates to garner more than 50 percent in a presidential race since 1988, when Bush's father was elected. Kerry of Massachusetts and his running mate, Senator John Edwards of North Carolina received 54.5 million votes, or 48 percent, with 98 percent of precincts reporting, CNN said.

`Result is Clear'

``President Bush ran forthrightly on a clear agenda for this nation's future, and the nation responded by giving him a mandate,'' Vice President Dick Cheney said in a victory speech yesterday.

Kerry called the White House and conceded to Bush, who led in Ohio by 134,019 ballots with most precincts reporting. Ohio's 20 electoral votes gave Bush 274 votes to Kerry's 252; 270 are needed to win.

``We talked about the danger of division in our country and the need, the desperate need, for unity,'' Kerry, 60, said in his concession speech in Boston yesterday.

In his victory speech yesterday, Bush reached out to Kerry supporters. ``I want to speak to every person who voted for my opponent,'' he said. ``To make this nation stronger and better, I will need your support, and I will work to earn it,'' Bush said. ``A new term is a new opportunity to reach out to the whole nation.''

`Outdated Tax Code'

Bush also laid out part of his second-term agenda: ``We'll reform our outdated tax code. We'll strengthen Social Security for the next generation. We'll make public schools all they can be. And we will uphold our deepest values of family and faith.''

The president will also likely have an impact on the judicial system. He may take on the nation's trial lawyers over what he calls ``frivolous lawsuits'' that drive up health-care costs.

And he may get a chance to remake the Supreme Court, where four of the nine justices are in their 70s or 80s, and Chief Justice William Rehnquist, 80, is suffering from thyroid cancer. His choice of court nominees may be influenced by a desire to reward the millions of people, many of them Christian fundamentalists, who said they voted for him more because of his ``moral values'' on marriage and abortion than his record on terrorism and the economy.

Republican Gains

The Republicans made gains in Congress. They will hold a 55- 44 majority in the Senate, picking up a net four seats there. The Senate has one independent. They gained two seats in the House, where they now have a 231-200 lead, with one independent. Three races are undecided.

At the same time, Bush faces a poisoned political climate after a race that turned more on questions of character than policy. It was marked by a record $575 million in spending by the two presidential campaigns, according to the Federal Election Commission. Democrats will have little incentive to cooperate.

There's discord even among Republicans. Senator Richard Lugar, 72, chairman of the Foreign Relations Committee, says the administration's incompetence made the Iraq insurgency worse. Richard Viguerie, 71, a Republican fundraiser who pioneered direct-mail solicitations to voters four decades ago, promises what he termed a war for the soul of the party. He says Bush has allowed government to expand by not vetoing a single spending bill in his first term.

Bush enters his second term with the outlook for economic growth stronger than when his father, George H.W. Bush, unsuccessfully sought re-election in 1992 -- even though he's the first president since Herbert Hoover in the Great Depression to preside over a net loss of employment.

Job Losses

Since Bush became president in January 2001, 821,000 jobs have been lost. The economy will expand 4.4 percent this year, its fastest since 1999, according to a Bloomberg News survey of economists last month.

Yet Iraq, where the U.S. military has ceded swaths of the country to insurgents, will initially overshadow all else for Bush and Cheney, says John Mueller, a presidential historian at Ohio State University in Columbus.

``Getting out of Iraq is Bush's top challenge,'' Mueller says. ``Everything else pales in significance. Cut your losses. Leave before it becomes an even bigger disaster. Given his stubbornness, he may stay.''

Bush and interim Iraqi Prime Minister Ayad Allawi say they plan to regain control of Fallujah and other rebel-held areas before the nation's January elections. The U.S. has carried out almost daily air strikes on Fallujah since last month.

`War President'

Bush himself linked the war to the fight against terrorism, making that the centerpiece of his run for re-election as the 43rd president.

He became a self-styled ``war president'' after the Sept. 11, 2001, attacks on the World Trade Center in New York and the Pentagon near Washington. Those attacks -- along with a plane that was crashed in Pennsylvania -- killed an estimated 2,973 people, not including the 19 hijackers who committed suicide while carrying out the most deadly terrorist strike ever on U.S. soil, according to the New York City medical examiner's office.

``After Sept. 11, Bush went from having a vision to having a mission,'' says Stanley Renshon, a political science professor at the City University of New York who wrote ``In His Father's Shadow: The Transformations of George W. Bush,'' published in September. That left Bush feeling largely immune to criticism, Renshon says.

`The Kevlar President'

``Things just rolled off Ronald Reagan; this guy Bush is the Kevlar president,'' he says, referring to a fiber used in bulletproof vests. ``People trust him, those that do. In a time of uncertainty, it carries a lot of weight to be able to trust what the leader says and know he is a stand-up guy who is going to keep standing even when there are a lot of blows to the body.''

``Bush is a person who likes people, he's a gregarious guy, a backslapper,'' Renshon says. ``What's not so commonly understood is he doesn't have a need to be liked.''

Renshon, also a psychoanalyst, has written 11 books on the psychology of presidents, including a book on President Bill Clinton called ``High Hopes'' that won awards from the Political Science Association and the Psychoanalytic Association.

Bush defied international protest and went to war against Iraq, linking Saddam Hussein with the global war on terrorism, even though he never produced concrete evidence. He sought United Nations backing for the war; when he couldn't get it, he invaded anyway.

`Hammer Coming Down'

That resolve, which Kerry derided as stubbornness and the president's supporters viewed as decisiveness, will continue to define his conduct of the war, says Richard Allen, who was Reagan's top foreign policy adviser.

``You'll probably see the hammer coming down on miscreants in Fallujah and a very swift and decisive series of moves to make it secure for elections,'' Allen says.

Bush today vowed to help Iraq defeat insurgents: ``These elections are important, and we will respond to the requests of our commanders on the ground,'' he said. ``I have yet to hear from our commanders on the ground that they need more troops.''

More than 1,100 American military personnel have been killed in the 20 months of the war, and Islamic insurgents have abducted at least 150 non-Iraqis, executing more than two dozen.

David Gergen, an adviser to Presidents Nixon and Clinton, says Bush may not have a vision for Iraq beyond the elections in two months.

``He can say by late January that we had an election and we're going to turn over the keys to the Iraqis and it's up to them from now on and start pulling back,'' Gergen says.

Like the Cold War

That will still leave Bush facing other potential foreign policy crises, including North Korea -- which, unlike Iraq, openly declares it has nuclear arms -- and Iran, which is defying international pressure and is suspected of developing the weapons.

``The overseas challenges are immense and going to require as much time from the next president as security issues did during the Cold War,'' Gergen says.

Bush's victory represents the success of his strategy to make voters focus their choice on which candidate could better protect Americans from terrorism.

It is also a victory for Bush's chief political adviser, Karl Rove, who targeted evangelical Christians, who he said kept the margins close four years ago. Rove calculated that 4 million evangelicals stayed home in 2000 after a revelation that Bush had once been charged with driving under the influence of alcohol.

During the campaign, Bush emphasized issues such as a constitutional ban on gay marriage and his support for limiting stem-cell research.

Moral Values

Exit polls of 13,531 voters nationwide showed that 22 percent cited moral values as their top issue, trumping the 20 percent who cited the economy, 19 percent who chose terrorism and 15 percent who selected the Iraq war, according to CNN. The two candidate qualities that voters cited most often were strong leadership and bringing needed change, according to the surveys by Edison Media Research and Mitofsky International.

Even with a spreading insurgency, revelations about the abuse of Iraqi prisoners and reports that more than 350 tons of powerful explosives went missing from a former Iraqi military installation after the U.S. occupation began, Bush convinced enough voters he was a strong leader who would keep them safe.

``All the progress we hope to make depends on the security of our nation,'' he said at an Oct. 25 rally in Greeley, Colorado. ``We face enemies who hate our country and would do anything to harm us. I'll fight these enemies with every asset of our national power.''

Nation-Builder

That message resonated with voters in the face of setbacks, including the CIA's conclusion that Hussein had no weapons of mass destruction and that Iraq's program to develop nuclear arms was in decay by March 2003, when the invasion began.

Bush's campaign as a war president stood in contrast to his first run at the presidency, when he said in the debates with Gore that he opposed using U.S. troops for ``nation-building,'' as the military had done in Haiti and Bosnia during Clinton's two terms in office.

Instead, he focused on domestic goals, including creating testing requirements for grade-school children, tax cuts, an energy bill and a Medicare prescription-drug plan.

Now, with 138,000 U.S. troops in Iraq and about 11,000 in Afghanistan, Bush has done an about-face in his position on nation-building and the role of the American military in promoting democracy, says Allan Lichtman, a presidential historian at American University in Washington.

``That may be his most critical legacy,'' Lichtman says.

`Uniter, Divider'

The presidency changed Bush, who came into office promising to be a ``uniter, not a divider,'' says Renshon of City University of New York.

``His aspirations ran headlong into his ambitions,'' he says. While Bush wanted to bring the country together, he also wanted to transform the nation's politics by emphasizing tax cuts instead of government spending to stimulate the economy, and introducing market mechanisms to programs such as Medicare and Social Security.

``It was unrealistic to think that you could at one and the same time be a uniter and a transformational leader,'' Renshon says.

``President Bush had a very good record in Texas working across the aisle, and he thought that he could take that to Washington,'' says Armey, 64, who's now a senior policy adviser in Washington for law firm Piper Rudnick LLP. ``Many of us said at the time he's in for a big surprise. National Democrats are not as cordial to work with as Texas Democrats.''

It's not the first time Bush shifted positions. Six days after the terrorist attacks, he said he wanted to see Osama bin Laden, head of the al-Qaeda terrorist network, killed.

`Dead or Alive'

``There's an old poster out West that says, `Wanted: Dead or Alive,''' Bush told reporters on Sept. 17, 2001, referring to staple props in Hollywood movies about America's Old West.

He didn't bring bin Laden to justice and began to omit references to the terrorist's name during the campaign. Most voters didn't hold that against him, even when bin Laden showed up on a videotape four days before the election warning Americans that another strike was possible.

And Bush never publicly owned up to making a mistake.

During the second presidential debate, at a town hall-style meeting in St. Louis on Oct. 8, he was asked to name three instances in which he made a wrong decision. He chose not to name one.

``I made some mistakes in appointing people, but I'm not going to name them,'' he said. ``I'm fully prepared to accept any mistakes that history judges to my administration. Because the president makes the decisions, the president has to take the responsibility.''

`Big Quagmire'

A deteriorating situation in Iraq may give Bush greater incentive to focus on his domestic agenda, including creating private retirement savings accounts designed to shore up Social Security, says Chris Edwards, an economist at the Cato Institute, a Washington research group that advocates shrinking government and has published papers opposing the war.

``If I were him I would be thinking, `I don't want this big quagmire in Iraq to be my big legacy,''' Edwards says.

Bush may have to back down on his biggest domestic initiative, making permanent his tax cuts, Edwards says. ``The tax cuts are a legacy that may not last because of the giant deficits,'' he says.

U.S. budget deficits will total $2.3 trillion over the next decade and may be almost double that if tax cuts are renewed as Bush wants, the nonpartisan Congressional Budget Office said in September. The deficit in the year ended Sept. 30 reached a record $412.6 billion, the Treasury Department said Oct. 14.

$2 Trillion Tab

Bush entered the White House with the Congressional Budget Office projecting a $5.6 trillion surplus for the 10 years ending 2011. He envisioned using some of that money to offset the cost of his Social Security plan. That plan would allow workers to divert part of the Social Security taxes on their paychecks to private accounts, which they could invest in the stock market.

It's part of Bush's plan to promote what he calls an ``ownership society'' -- Americans taking charge of how their social welfare money is spent -- which he says will be a dominant theme of his second term.

Since Social Security taxes are used to fund current benefits for retirees -- the pay-as-you-go system -- diverting some of the levy to private accounts means the government would have to make up the difference. Those transition costs will amount to between $1 trillion and $2 trillion over 10 years, the Congressional Budget Office estimates.

Bush wants to allow younger workers to invest in stocks to ensure the system won't run dry after baby boomers, or those born between 1946 and 1964, begin to retire in 2008. Social Security will go into deficit by 2018, when many of the 76 million baby- boom generation reach retirement age, according to the Social Security Administration.

`Wind Out of Sails'

The deficit, combined with the Dow Jones Industrial Average's decline of about 8 percent since January 2001, will make it difficult to get through Congress any plan that ties retirement savings to the equity markets, said Representative Jim Kolbe, 62, an Arizona Republican and co-sponsor of a House bill to create private accounts.

``It takes some of the wind out of the sails,'' Kolbe says. Still, he says, ``There is no 10-year period where the stock market hasn't outperformed Treasury bills.''

Gergen says Bush's domestic agenda will be constrained by fiscal and political challenges.

``You've got the deficit issue, the nation's finances, the looming retirement of the baby boomers, plus energy,'' he says, referring to record-high oil prices. ``And the Congress is so sharply divided it is almost paralyzed.''

Iraq Spending

Bush pledged to halve the deficit in five years. His reluctance to veto any spending measures casts doubt on that, as does his failure to include in the budget any further costs for Iraq and Afghanistan in estimating a $229 billion deficit in 2009.

The price tag for the military occupation of the two Muslim nations is likely to run to tens of billions of dollars for the foreseeable future, said Steven Kosiak, a defense analyst for the nonpartisan Center for Strategic and Budgetary Assessments in Washington.

Since the invasion, the U.S. has spent $120 billion in Iraq and is likely to pay at least $60 billion next year, Kosiak said. That compares to $80 billion for the first Gulf War in 1991, 90 percent of which was financed by U.S. allies including Saudi Arabia, Kuwait and Germany.

Bush plans to seek additional funding of about $70 billion to cover the cost of the wars in Iraq and Afghanistan, U.S. Army General Paul Kern said last month.

`Big Government Republican'

Kern, who oversees the U.S. Army Materiel Command, told reporters in Washington on Oct. 26 that he may need as much as $9 billion annually just to repair or replace equipment damaged or destroyed in Iraq. Probably about $50 billion of the $70 billion will be spent during 2005, he said.

Bush fueled charges that he's a ``big-government Republican'' by increasing spending at a higher rate than the Clinton administration did, according to the Heritage Foundation, a Washington-based research group that also advocates smaller government.

Domestic discretionary spending increased an average of 8 percent during Bush's term, compared with an average of 5 percent during Clinton's eight years in office, says Brian Riedl, a Heritage Foundation budget analyst.

``Once the war started, President Bush not only increased defense spending, but he continued increasing domestic programs,'' Riedl says. ``He chose guns and butter.''

Big Spender

At the same time as Bush cut taxes, he signed into law a $190 billion farm-subsidy bill and legislation providing a prescription-drug benefit that may cost $550 billion. Spending on education jumped 77 percent, health research 54 percent and veterans' benefits 34 percent under Bush, Riedl says.

Glenn Hubbard, former head of Bush's Council of Economic Advisers, says the major focus should be on so-called entitlements, including Social Security and Medicare, that are enshrined in law.

``The deficit that's truly alarming is the entitlement deficit,'' including the government's debt to future retirees unless Social Security is changed, says Hubbard, 46.

Still, Hubbard sees the administration focusing most in the next four years on overhauling the tax system, including making permanent the tax reductions and measures to simplify the tax code.

Tax Rewrite

Bush hasn't offered specifics for simplifying taxes. ``We must reform our complicated and outdated tax code,'' Bush said today. That could include replacing the individual income tax with a national sales tax, says John Fortier, a research fellow at the Washington-based American Enterprise Institute, which advocates limited government.

One bill in Congress, sponsored in the House by Republican Representative John Linder, 62, and in the Senate by Saxby Chambliss, 60, both of Georgia, would scrap the income tax in favor of a 23 percent national sales tax.

Bush will also press for energy proposals, including regulatory changes and tax breaks for domestic energy producers. A focus of Bush's plan is allowing oil drilling in Alaska's Arctic National Wildlife Refuge, which may contain as much as 16 billion barrels of recoverable oil, according to the U.S. Geological Society.

Ill Will

Republican-backed energy legislation also would repeal a 1935 antitrust law that bars utility companies from buying other utilities that aren't connected to their existing power networks.

Bush will find it difficult to win congressional approval for almost any initiative he pursues, says John Pitney, who teaches courses on Congress and the presidency at Claremont McKenna College in Claremont, California.

``There will be an accumulation of ill will from many sources on the House side involving relations between Republicans and Democrats, and more broadly, opposition to the Iraq war,'' says Pitney, who worked for Cheney when the vice president was a Congress member from Wyoming.

Bush's biggest impact on domestic policy may be in making appointments to the Supreme Court. The court hasn't had a vacancy in a decade, the longest period without a new justice since 1823.

History suggests at least one retirement or death will occur during the next four years: Every full-term president other than Jimmy Carter has appointed at least one justice.

Cabinet Changes

Bush's choices for court vacancies may be unpredictable for those expecting him to promote judges favorable to corporate interests: The two justices he said in 1999 that he admires, Antonin Scalia and Clarence Thomas, agree with the president on abortion and gay rights, yet often vote against businesses on such issues as punitive damages and job discrimination.

Both Scalia and Thomas read the U.S. Constitution as conferring only those rights contemplated by the authors, meaning the document neither protects abortion and gay rights nor bars excessive damage awards in medical malpractice or product liability cases.

Bush will probably also face cabinet-level changes in his new term. Secretary of State Colin Powell, Attorney General John Ashcroft and Health and Human Services Secretary Tommy Thompson top the list of likely departures, says Norman Ornstein, a scholar at the American Enterprise Institute.

Possible replacements include National Security Adviser Condoleezza Rice, 49, as secretary of state, says Bruce Bartlett, who has written about cabinet selections as a senior fellow at the National Center for Policy Analysis in Dallas.

Bush said today that he's starting to think about changes to his Cabinet. ``There will be some changes,'' he said. ``I don't know who they will be.''

Cheney said during his debate with Edwards that he has no aspirations for any other office after he serves a second term.

Rumsfeld Stays

Loren Thompson, an expert on security issues at the Lexington Institute in Washington, says he expects Homeland Security Secretary Tom Ridge, 59, to leave, and Defense Secretary Donald Rumsfeld, 72, to stay for a while, partly to seek a resolution of the war in Iraq.

``Rumsfeld needs to stay in order to prove he was right,'' Thompson said.

Ornstein said he expects Treasury Secretary John Snow to stay. Snow, 65, traveled to 23 states this year to promote Bush's economic agenda.

That agenda may have been easier to sell to voters than to Democrats in Congress, who remain a potent enough minority to block many of Bush's initiatives. Armey says Bush may have to do what he did in much of his first term and press on without much bipartisan support.

``If the rancor's going to be ended, it's going to be time for the Democrats to reach out,'' Armey says. ``I think the president has to move forward without them.''

``Bush suffers no illusions about the generosity of the Democrats,'' Armey says.

Throughout the campaign, the president said that voters had no illusions about him as a leader.

``Americans have seen how I do my job,'' Bush said at the Oct. 25 Colorado rally. ``Even when you might not agree with me, you know what I believe, where I stand and what I intend to do.''

To contact the reporter on this story: Heidi Przybyla in Washington Or hprzybyla@bloomberg.net

Last Updated: November 4, 2004 13:37 EST