The movie starts with a scandal at the White House where the unseen and nameless The President of the USA is accused of fondling a young girl scout visiting the Oval Office just a few weeks before Election Day. Being the third party observers, we know the truth, he's guilty.
Conrad Brean (Robert DeNiro), a notorious political "spin doctor" is called to a secret midnight meeting at the White House underground command bunker by Winifred Ames (Anne Heche), one of the President's many advisers, where she asks for his help to engineer a way and a means to divert the news of the scandal when it breaks in the newspapers the next day. Brean suggests creating an artificial war for television only to distract the American public and let the President get on with the job at hand... thus protecting the free world.
Brean and Ames fly to Hollywood where Conrad hires brash Hollywood producer Stanley Motts (Dustin Hoffman), whom worked for Conrad several times in the past, to help fabricate this non-existent war with the selected country of Albania to divert the public with the real news about the President's extra-marital trysts. Motts is glad to help out of blind loyalty to service for his country.
At an all-night gathering at Motts' Hollywood home, he assembles a team of loyal specialists whom include creative consultant Liz Butsky (Andrea Martin), country-western singer Johnny Dean (Willie Nelson), and entrepreneur Fad King (Dennis Leary) to help out fabricate the means for the "war with Albania". The next day, Motts and Brean venture to a studio back lot that Motts rents out where he hires a young, up-and-promising actress named Tracy Lime (Kirsten Dunst) to play an Albanian peasant girl carrying a CGI cat through the green-screen set up of a destroyed Albanian village. The filmed scene makes the evening news and brings up public intrest in the war.
However the very next day, Brean and Ames are riding in a limo when they are pulled over and detained by CIA agents led by Charles Young (William H. Macy) who confronts them with fabricating the non-existent war with Albania. Brean manages to talk the CIA agents to releasing them by insinuating that the CIA knows little about what is really going on with the world behind the scenes. Mr. Young releases them, but the next day, the CIA leaks the story about the war in Albania being over and focusing the attention back on the President. Everyone is upset, but Motts downplays the setback by declaring "this is nothing" (the start of a running joke that gets increasingly hilarious as the movie progresses), and proposes an "Act Two" to spin another fabricated story about a secret American unit stuck behind enemy lines and the missing-in-action story about a fellow American left behind in Albania.
Motts's team of experts again go back into action by constructing a theme song about the missing soldier left behind as 'Old Shoe' sung by Johnny Dean as a 1970s pop song. Soon, the American public becomes consumed once again by the war and patriot fever as Election Day counts down and the President's popularity rises again as the public quickly forgets about the secret White House tryst.
However, more setbacks occur when Motts and Brean suggest bringing in a candidate to impersonate their non-existent war hero as an image to the public. But at a secret midnight meeting on a airport runway, the military police arrive where they agree to release a dangerous mental patient who once served in the military because he has the same last name, "Shoe", to portray the war hero of the conflict. The military release Sgt. William "the Old Shoe" Schumann (Woody Harrelson) into their custody as Motts, Brean, and Ames fly away in a private plane through a raging thunderstorm towards Washington DC to welcome 'Old Shoe' back from Albania.
However the plane crashes (off-camera) killing the pilots and stranding Motts, Brean and Ames along with the deranged Schumann in a rural part of South Dakota ("this is nothing" Motts quotes yet again). The four of them are forced to hitch a ride on a tractor from a passing farmer to a gas station to call for help. It is there when Schumann attempts to sexually assault the wife of the gas station owner which results in him getting shot dead in self defense by the owner.
Despite this latest setback, (Motts again relates his quote "this is nothing") the trio return to Washington and they have the dead Schumann buried in Arlington National Cemetery as a war hero killed in the plane crash, and the funeral is broadcast all over the national news.
Election Day comes and goes. The President defeats his rival Senator John Neal (Craig T. Nelson, in an uncredited cameo) and is thus re-elected president. As Motts and Brean celibrate their victory for a job well done, they watch a TV broadcast about the President's re-election campaign. Everything seems fine... until Motts sees that the media are crediting the president's election win to his tired "Don't change horses in mid stream" campaign slogan, rather than Motts's elaborate plans. Motts announces that he will call the media to "set them straight," despite Brean's warning him that he is "toying with his life." When Motts refuses to back down and walks out wanting to take the credit for the President's successful re-election, Brean very reluctantly orders a nearby secret service agent to do what they have to do. Motts is seen being taken away by several agents to a waiting car.
The next morning, Brean reads a news report about Motts being found dead at his Hollywood home from an apparent "heart attack"... strongly impying that Brean and Ames and their associates had Motts killed and covered it up to prevent him from talking to the press about the truth of the fabricated war. Brean never less goes to attend Motts' funeral anyway.
In an ironic tragicomedy ending, movie ends with a news report about a violent incident in Albania, but it is unclear whether this is a true event and that a very real war between the US and Albania has started, or simply a continuation of the fictional war.