Although in hindsight Dukakis gets termed "too liberal" in contrast to Bill Clinton, ideologically, the two were actually quite close. Many of Clinton's key advisers and staff were active on the Dukakis campaign (Madeleine Albright, Larry Summers, George Stephanopoulos, etc.) and
his cabinet would likely have closely resembled Clinton's as well.
George H.W. Bush largely deferred to the Democratic Congress on policy, so I don't see any obvious big changes. Some potential changes include an earlier Family and Medical Leave Act, EPA becoming
a full cabinet-level "Department of Environment Protection," and an earlier attempt at health care reform. (I don't see it as any likelier for Dukakis to succeed where Clinton failed -- there were too many intra-Democratic divisions.) Like Bush, he'll spend much of his first year dealing with the Savings and Loan Crisis, and Dukakis is likely to make a big push on infrastructure and industrial policy. (Here's
an '88 NYMag piece by Joe Klein on a prospective Dukakis Administration.)
For the Supreme Court, Dukakis might well get four picks within the single 1989-1993 term. Brennan and Marshall are likely to retire as in OTL, and both Byron White and Harry Blackmun were waiting for a Democratic Administration to step down. Breyer seems like a likely pick; Ginsburg is possible, though OTL she was a dark horse for Clinton. Harry Edwards seems likely to replace Thurgood Marshall; beyond that it's harder to guess. Maybe Larry Tribe or Mario Cuomo, although the former would likely be filibustered by Republicans after he testified against Bork. (Cuomo was offered the seat that went to Ginsburg by Bill Clinton but turned it down.)
Politically, though, I could see a '94-type wave coming in 1990 or by 1992. There was considerable anti-incumbent sentiment that year, but it was shielded by Democrats controlling Congress and Bush the White House. If anything, a Democratic Party led by a northern Democrat will probably see larger losses in the south than they got under Clinton. That said, Bob Michel as House Speaker will be more moderate and willing to work with Dukakis than Newt Gingrich was post-94. An earlier GOP wave will also have big butterfly effects down the road.
Iraq and Kuwait are hard to game out. As pointed out, maybe Dukakis' Administration will provide fewer mixed signals to Iraq, forestalling an invasion. But it's unknowable. And although Democrats were generally skeptical of military action, post-Vietnam and post-Reagan's Nicaraguan intervention, Dukakis' advisers (who would later become Clinton advisers) were relatively hawkish.
I could see '92 going either way. Bob Dole, Jack Kemp, or Carroll Campbell of South Carolina are all potential nominees. If Dukakis can win reelection, '96 sets up an open field that could favor the Republicans. I don't see Bentsen running at 75, though it's possible he could make a one-term bid.
Overall, my general thought is policy-wise an earlier Clinton Administration, although without the personal scandals and some of the frostiness of the Carter WH.