June 14, 2004

BY ROBERT NOVAK SUN-TIMES COLUMNIST

During the pause in prematurely frenetic election campaigning forced by mourning for Ronald Reagan, senior policy advisers to George W. Bush pondered two serious questions: What domestic policy initiatives should President Bush pursue in a second term? Which of those should he campaign on this year?

The answers will soon be debated inside the White House over how much reform Bush should risk. Political advisers are cautious and policy advisers bolder as they ponder these areas: Social Security, Medicare and taxes. Most likely, the president will advocate Social Security reform during this year's campaign, wait for a second term to reform taxes and not venture at all into Medicare's troubled waters.

The broad strategic question is whether Bush should seek a second term strictly as a ''war president'' fighting terrorism, the one area where current polls show him well ahead of John Kerry. While the political team wants to stick to the anti-terror agenda, the policy team considers it vital for the Bush presidency to confront issues that he was expected to address in a first term but did not. These are the decisions that only Bush himself can make.

Medicare is the issue he almost surely will forgo. Senior administration officials privately admit that last year's prescription drug bill was a disaster substantively and politically. The golden opportunity for Medicare reform was squandered. Although the need for basic change along market-based lines persists, nobody has the will to revisit this issue any time soon.

Social Security is another matter. The need for change is pressing, and the basic element of reform has been decided: private retirement accounts. But that will not be enough. Means-testing is needed to remove from the rolls rich old Americans who don't need the federal stipend, many of whom long ago exhausted their contributions to the system. That change would demolish the fiction that this is a genuine insurance system rather than government welfare.

The big political problem is cost. Transition expenses for private accounts amount to $1 trillion over 10 years. A more radical reform, however desirable, will cost even more. The difficult argument against Democratic opposition will be that these costs eventually must be incurred by the federal government, if not now, then later.

Bowed down by the war on terror and cautioned by conventional political wisdom to tread softly, Bush has hardly mentioned Social Security this year. But successful Republican candidates braved this supposedly lethal issue to their advantage in 2002, particularly among young voters receptive to changing a system they think will never benefit them. Bush faces conflicting advice over how much or how little he should pursue this course against Kerry.

Tax reform is much more complicated and dangerous. When Republicans seized control of Congress in the 1994 elections for the first time in 40 years, radical restructuring of the Internal Revenue system was near the top of everybody's list. Yet, a decade later, the GOP has not even debated -- much less chosen between -- a flat tax and a national sales tax. Bush ignored the issue in the 2000 campaign and throughout his first term.

The obstacles to true tax reform, posed by both the liberal establishment and the Washington lobbying cartel, are formidable. Policy difficulties to be untangled are massive. Although the end of an intrusive tax system detested by millions promises rich rewards, no plan is ready for Bush in the 2004 campaign. It is an issue for his second term, but one that senior advisers believe he must address then.

When President Franklin D. Roosevelt announced ''Dr. New Deal'' had given way to ''Dr. Win the War'' upon U.S. entrance into World War II, his historic aggrandizement of the federal government was in place. Except for his signature tax cuts, Bush's first term has averted the risky battles required for institutional reform. The president has shown in his invasion of Iraq his willingness to take risks, and he now is being urged to do the same on the domestic level if he is elected to a second term. If he loses this election, these issues will not be addressed for another decade or more.