(FORTUNE Magazine) – PRESIDENT BUSH SERVED NOTICE shortly after his big election win last year that he'd do whatever it took to bring the D.C. establishment to heel and radically remake Social Security, the tax code, and the federal budget deficit. Drawing on the legacy of President Ronald Reagan, who made sweeping and unpopular policy decisions, Bush insisted, "I earned capital in the campaign, political capital, and now I intend to spend it."

But his first-term record and early second-term signals suggest Bush will be unwilling to force painful, epic changes. While he's widely portrayed as ready to make the tough calls on foreign policy, on the domestic front his first-term record shows a pattern of shying away from inflicting pain on any major segment of the electorate, even when it's for the greater, long-term economic good. On trade, the White House talked liberalization while imposing tariffs and quotas; on the deficit, Bush offered tax-cut goodies for everyone while signing off on the biggest surge in government spending in more than 20 years; when it came to shoring up Medicare, he backed a prescription-drug benefit that adds at least another $8 trillion to the program's $20 trillion future liability.

Will Bush's second term be any different? There are early signs the White House is already retreating from its bold pronouncements. Remember those promises to get tough on the deficit? Just last month Bush signed a massive spending bill including another $15 billion in pork. Lately the administration has been suggesting it will use its initial 2004 deficit forecast of $521 billion, rather than the actual 2004 deficit of $413 billion, as a starting point for measuring its progress toward halving the deficit--in effect lowering the bar. And it looks as if the White House's upcoming 2006 budget proposal will err on the side of optimism and project a large jump in tax revenue (admittedly other Presidents have used this trick) while excluding costs for Iraq and a Social Security overhaul. Presto! Deficit halved --on paper, at least.

On tax reform, the White House said it would radically simplify an economically damaging system riddled with loopholes. But shortly before the election Bush signed a big corporate tax bill stuffed with new breaks, and after the election he suggested some of the biggest breaks should stay, including deductions for mortgage interest. Meanwhile administration officials hint they'll push for incremental rather than radical change, and may delay any significant reform effort to 2006. Hardly Reaganesque (the 1986 tax reform act slashed loopholes and sharply reduced the number and levels of all tax brackets, dramatically simplifying the code).

On Social Security, while Bush talked about eliminating the $11 trillion hole facing the program, his emphasis since the election has been on adding new private savings accounts and borrowing bigtime to pay for them. Even White House officials admit in a leaked memo that that doesn't solve the problem. Bush has ruled out payroll tax increases but hasn't made a peep about concrete ideas to reduce benefit payouts, such as raising the retirement age.

To believe the White House will push hard for economic reform, "you have to believe that there will be a big cultural change within the White House, and that the President will put down more political capital than he's ever been willing to risk as governor or as President," says Lehman Brothers public policy analyst Kim Wallace. If Bush were serious about deficit cutting, tax simplification, and Social Security reform--and investors believed it--shares in tax preparers would be tanking faster than Britney Spears's career, and Treasury bond prices would soar on long-term bets that future deficits would shrink, making bonds more scarce than expected. For the most part that's not happening. Until it does, we're still awaiting Reagan's real successor. -- Peronet Despeignes