A film about a US president embroiled in scandal? It's all too much of a coincidence, writes John Lyttle
Barry Levinson is telling me how he, Robert De Niro and Dustin Hoffman lied to Bill Clinton. Levinson begins with a guffaw, but being a gentleman and "more of a Democrat than a Republican" he sounds embarrassed, too.

"We were in Washington. It was the last day of shooting on Wag the Dog. It was a day-night shoot. You know, half-day, half-night. Everyone was exhausted. When we got finished we went to the nearest hotel for dinner.

"Well, they were throwing a fund-raiser on the other side of the hotel, and as Bobby, Dusty and I were leaving we collided with Bill. I mean the President. The Secret Service guys were hanging around with their walkie-talkies and we stood in the corridor shooting the breeze - Clinton is very interested in Hollywood - when suddenly the President asks, `Hey guys, what's the movie about?'"

Levinson's pause is artful, as befits the shaggy-dog joker who wrote, produced and directed Diner and Tin Men.

"Bobby looks at me. I look at Bobby. We both look at Dusty. The silence is pretty uncomfortable. Then Dusty takes a big gulp and starts rattling off this plot, Makes it up as he goes along."

Does he recall the details? Did the narrative apparently ramble, and in patented and prized Levinson fashion? The answering laugh is low, throaty and less strained now. "Look, all I was conscious of was the feeling of relief flooding through me."

You can see why. Here's the story Barry, Bobby and Dusty covered up: encumbent US president is days away from re-election when a young woman accuses him of "inappropriate sexual behaviour". Mysterious spin doctor Conrad Brean (De Niro) magicks the perfect diversion - a fake war with ... Albania. (Think Grenada. Think Falklands. Think viciously funny.) Thus it is done, thanks to computer FX, an off-the-peg hero-hostage (Woody Harrelson), a faux patriotic song and the egomaniacal yet awesome talents of the movie producer Stanley Motss, played by the Oscar-nominated Dustin Hoffman.

The picture might have been hailed (or dismissed) as midnight-black comedy - politics stripped and ripped into as just another branch of showbiz - except that the banner headlines about Monica Lewinsky and a looming renewal of hostilities in the Gulf hit first. Events have made Wag the Dog a demonstration of its own jaundiced conclusion: contrary to the Sprite tag line, image is everything. Perception, not fact, is all. If the film works superbly as satire, circumstance makes it even more convincing as documentary. In fact, if you were a conspiracy buff you might almost suspect that Levinson and the scriptwriter, David Mamet, had been tipped off. Levinson says no. "I thought the movie would be timely. Who knew how timely?" Indeed. And yet - even the photo of the fictional President greeting his accuser on the White House lawn seems modelled on real footage of Clinton and Lewinsky at a similar rally, though the film's mock-up was assembled months before the true footage was found. Spooky. X Files spooky.

Levinson calls it "accident, coincidence, luck". Good luck or bad luck? He's unsure. Though grateful for coverage - satire is traditionally a tough sell in the American market - he thinks most critics still haven't got the point, the same critics who've consistently underrated him and who are now wondering what a nice liberal like him is doing making a movie as blunt as this (those critics likewise fail to grasp the ambiguity in Levinson's cagey respect for Brean and Motss). "Wag the Dog wasn't meant to be about a particular president. It's meant to be about the modern presidency. About how 20 years of interconnecting politics, entertainment and the media have made us more easily manipulated. It's about how policy is created for the TV lenses, and about how language has been corrupted by men who stand before the cameras to deny rumours they themselves started." Levinson sighs. "That's kind of been lost in the scandal. Like the fact that we never actually show that the president has been lost. We were going to go that way. We were auditioning. Then one day I said, `Let's forget it. Let's not show him, the way they did in the old days - the way they used to do with Jesus.' I thought that beginning from reverence, that made it funnier. And it makes a greater point." Which is? "As I said, the presidency, not the president. Respect for the office if not the man."

Levinson calls Wag the Dog "a liberating experience". Shot fast and in every sense furiously, the schedule was a minimal 28 days, unheard of in the A-list circles the director usually frequents. Why 28 days? Because 28 days was exactly the downtime released by the postponement of Sphere, the troubled $80m sci-fi epic Levinson and Hoffman were supposed to be filming for Warners. "We went to New Line, and I had Dustin, and Bobby wanted to work with Dustin again because they had only one scene together when I directed them in Sleepers, and New Line knew Dustin trusted me after Rain Man ..." Levinson trails off. Hoffman has been legendary - notorious - for months, for acting up on set: he is the angry obsessive that the film Tootsie presents him as. With a 28-day timetable there could be no tantrums.

There weren't. It's a fluke, but with Wag Hoffman finally enjoys the artistic freedom that commercialism invariably cramps. The irony: Sphere bombed while Wag garnered raves and revenue. Levinson is sage: "Wag came in for under $18m. We didn't have to pander to any sensibility. No one said, `Make it a little softer'. Circumstance again."

Which hasn't stopped journalists from digging to find the sort of hidden agenda Wag finds lurking behind every congressman in his mandatory dark suit, white shirt and red tie. Most have noted that Levinson co-produced the anti-far-right spoof Bob Roberts, but have neglected to mention how Wag continues the director's themes. For instance, Good Morning, Vietnam explored the tranquillising and reviving properties of propaganda. Avalon concerned itself with the way TV transformed the American dream into soap opera. Toys showed how war might easily be turned into a video game. Bugsy had the romance of violence. Disclosure was suspicious of corporate culture. Sphere promised enlightenment, only to watch the promise destroyed by fear. Each is about the different lies we're told or tell ourselves. There's little trust in authority, though there is Levinson's technique: controversy and commercialism, his background as a gag-writer coating a message audiences and critics still occasionally find hard to swallow (Avalon and Toys flopped, Bugsy under-performed, Sphere sank.) It's tempting to think that he views Wag the Dog as vindication - proof that others have been foolish to dub him a bleeding heart. Wag shows he can draw blood, too, and from deep within democracy and government.

But Levinson is preoccupied by a new worry. "Do you think they'll get this in Britain?" he asks. "Do you have spin doctors?" I whisper a couple of names: Peter Mandelson, Alastair Campbell. "Oh, yeah. Of course." Levinson's humour is instantly restored: "I guess the jokes are gonna travel after all."