Following is an edited text of the interview last Thursday with President Reagan conducted by Washington Post White House correspondents Lou Cannon and David Hoffman.

Q: Mr. President, the Soviets have responded to your zero-option proposal for reducing intermediate-range nuclear weapons in Europe with a plan of their own that evidently isn't satisfactory to your administration. However, do you interpret the Soviet response as a sign that the Russians intend to bargain seriously about arms reduction?

A: Well, I hope they do . . . . The difficulty with the offer was it still left them with a monopoly. In other words you could in one sense say they bought half of our zero option. Zero option for us but not for them.

Q: What do you expect to come out of the negotiations?

A: Well, we're staying with our position that we believe we have proposed something that is not only reasonable but that offers the best hope for peace. The situation has been, with an ever growing stock of warheads on their side in intermediate range that could hit not only everything in Europe but the Middle East and northern Africa, there has been nothing on our side for the allies as a deterrent . . . . You must always think of these military weapons as a deterrent to war. Because there isn't any defense against them. And our allies have asked us for a deterrent weapon, which we agreed to provide. What we're saying to the Soviet Union is, we'd cancel that order in a minute if they will do away with their intermediate-range missiles and make, as we call it, a zero option. Make Europe free of these intermediate-range weapons.

Q: Over the years you've described the Soviets as seeking world domination. Do you see the new Soviet leadership taking a different course than its predecessors?

A: I think it's too early to say on this. You must remember that in the Soviet government essentially the personnel remains the same. There may be a shifting of the people around in it but we know that the top command in the Soviet Union is the Politburo. And I don't think there's any way to indicate what individual ideas Andropov might have. But we also know that there is a limit to how far any man in his position can go without the support of the Politburo.

Q: What do you see now, after two years as president, what do you see as the long-term future of the Soviet state?

A: Well, just as we recognize that the western industrial world, including ourselves, is in a depressed economic situation and has great economic problems, and our own recession is just part of a worldwide pattern, that pattern goes beyond the Iron Curtain. Probably not because of the relationship with any of the western world, but because of their own emphasis on rearmament making it impossible for them to meet the consumer demands of their people. The Soviet Union, we know, is in a really precarious economic position.

My own feeling is that this may offer a great opportunity for us if we could convince them that there was a way for them to rejoin the family of nations--to, by deed not word, make it evident that they are not going to pursue their expansionist aims and that they are willing to join the rest of the world in the pursuit of peace. They could be a lot better off and their people a lot happier, not only with peace but with a far better economic situation than they have.

Q: Do you think you can convince them? Are you suggesting that you might be able to?

A: Well, I say it's an opportunity now. Some people have expressed the belief that the Soviet Union is expansionist in part at least due to a fear of the western world. Well, I think their fear is groundless. I think it's ridiculous to think that any of our allies or ourselves have ever had any ideas of expanding, certainly in the sense of attacking the Soviet Union. If they can be convinced of that, we'd all be better off.

Q: On Sept. 1, you called for withdrawal of all foreign forces from Lebanon. What are you prepared to do to bring this about?

A: Well, we have Ambassador Philip Habib and Ambassador Morris Draper over there right now . . . . They're meeting with them. We think the time is now for action. We made the proposal in September, a complete proposal leading toward a peaceful settlement for all the problems in the Middle East. But it begins with recognizing the sovereignty of Lebanon after all these several years of division and, I say, warlords with their own militias at odds with each other in Lebanon. The government of Lebanon should be sovereign over its own territory.

We think the time has come now for the foreign forces that are in there--Syria, Israel and the remnant of the PLO that is in there -- to get out. And that's why the multinational force was sent -- to, in a sense, help give some stability while the new Lebanese government established itself. For those countries to delay in getting out now places them in the position of being occupying armies. Because it was one thing to be in by invitation of Lebanon. It's another thing to cross a border because that border has been violated and other forces were attacking Israeli targets. But now that the Lebanese government has enough confidence in itself that it has asked them to leave, then to not leave is, as I say, they make themselves occupying forces.

Q: Withdraw simultaneously, or with the PLO first as Mr. Begin has said?

A: Well, these are the details to be worked out over there and what Habib is trying to work out with them. And then we can get on with the major business of negotiations to bring about peace and eliminate the differences that have kept the Middle East in turmoil all this time.

Q: If the Congress next year decided to give you the MX missile that you seek but only if you accept the basing system rotation of 100 or more MX missiles among a thousand or more underground silos similar to the one approved by presidents Ford and Carter, what would you do?

A: . . . That system was turned down simply because its vulnerability was apparent. All that it required was for an increase in the number of warheads from the Soviet Union and the system was out the window. I don't think it's been fairly portrayed as yet as to what this argument is about. It's almost as if we stubbornly are wedded to a basing mode . . .but we wanted to start production of the missiles and, knowing that we did not have a basing mode decision yet, we wanted to simply put the first ones off the line into existing Minuteman holes, silos, while we continued to work on the problem of a basing mode for the balance of those weapons, if not all of them.

The Congress refused to accept anything going into a Minuteman silo. Then Congress demanded that we present a basing mode. I promised that we would by Dec. 1. And with all of the things that were suggested, the one that we suggested, was the one that, as we described it, had the least warts. There's no such thing as a perfect system. So we presented that system and because of the Dec. 1 deadline did not give time for consultation with Congress or for them to really have a chance to have hearings, to find out about it themselves. So what we've said to them is, put back the money to start production. Fence it in that so we can't spend it. And this will not delay us in our rearming . . . and give us from now until spring to come up with this mode or alternative modes and require that they be satisfied as to what the final decision is on a basing mode. We think that this is a pretty fair proposition for them.

Q: Mr. President, many in your administration acknowledge that the next Congress is going to have more members hostile to your defense budget. Although you said in a recent interview that the defense budget should be based on national security considerations, as a practical political matter doesn't refusal to make concessions lead you into a possible stalemate that could threaten your larger national security goals?

A: Well, maybe they're not used to someone sending up an honest budget. Maybe they're used to the old-fashioned habit of everybody sending up about 10 percent more than they needed so that Congress could have some room to whittle. If you compare our five-year budget request in 1981, what we believed then was going to be necessary and before we knew about the reductions in inflation and all, you'll find that we ourselves had cut that five-year budget by $41 billion.

Q: Is there any whittling room at all?

A: But it has been whittled right now in the Congress. Both of them in the continuing resolution have reduced that budget and even if it is the larger of the figures . . . that will be $16 billion less than we asked for.

Q: In your political campaigns, you were outspokenly critical of large federal deficits. Recently, however, you referred to the persistence of a structural deficit. Has your experience as president led you to believe that we're going to have to learn to live with some kind of structural deficit?

A: No, I think what we have to do is restructure. There is one part of the restructuring that can only come about by reducing the national debt, and that is when you've got more than a hundred billion dollars outgo in interest payments. There isn't any one thing that anyone can decide about that. And the bulk of that has accumulated long before we ever came here.

I still feel that a government, like a family, should balance its budget and stay within its means. But what we've found with all the budget reductions, we didn't get all we asked for, and I think that should remain evident, but even with all of those there was a limit as to what we could do because of what the so-called entitlement programs, and herein lies your structural problem.

These were legislated in such a way that they made provision for automatic increase without any further legislation or approval being made, based on the standards that they put in for eligibility for these, and if the number went up the budget went up based on the COLA approach--the cost of living approach--and which incidentally in almost every instance has been way out of line with the real cost-of-living increase. Many of these programs, they've structurally built the deficit in.

. . . They must be reformed. Reform that provides for the needy and does not penalize those who, through no fault of their own, must have help from the rest of us. But reforms that would allow us to correct the inequities in them and to manage these programs properly. This is part of our desire for the federalism program, because I found as California governor that, without the strictures imposed on you by the federal government, you can get a lot more for each dollar out there if you have some control over the priorities and the actual method of spending. But this must be dealt with and we're going to try.

Q: Have you also discovered in your almost two years in office that there is a structural problem with unemployment that is also more persistent?

A: Well, unemployment and employment itself has changed structurally, yes . . . . The biggest single cause for the budget deficit is the recession and the fact that fewer people are paying taxes because they're unemployed and the fact that they are receiving benefits that must be funded by government.

But if the recession ended tomorrow we would find that the normal figure of unemployment . . . would be considerably higher than it's been in the past. For one thing there's been a drastic change in the mix of people who are considered in the work force. You take everyone from 16 on up in this country and consider them as potentially a work force. Now they aren't all involved in the work force. Many of them are students and so forth and many of them retired and all that. But today the growth in the number of people, the percentage of people that has entered the work force -- 3 million in the last two years--these would have required new jobs to be created. In the stagflation that we've had of the economy, those new jobs weren't being created. But the increased percentage of women who joined the labor force, younger people and more of them are in the labor force. The strange thing is that, with all this high unemployment, the percentage of people who have jobs and are working is a higher percentage of that above-16 pool than we have normally have had in the past when employment was full.

Q: Are you in a mood now to compromise at all with the Democratic opposition on the jobs bill. Would that do anything to solve anything?

A: No, it wouldn't. And that's one of the reasons why I'm not in the mood to cooperate with them, compromise with them. All of our past experience shows that the make-work jobs programs in the past, whatever they did in creating eventually some employment, usually it was so late that recovery had already taken place or was well under way . . . . Also, the taking of those funds from the economy to be used by government in that way resulted in uncounted unemployment in other sectors of the economy . . . . You just simply shifted the jobs from one group to another.

I have here in a briefing paper because I was sure we would get this, some of the things with regard to this $5.4 billion job that the House passed. It isn't carefully planned and it isn't a job program. It's a pork barrel in the old-fashioned sense and it might be the longest list of pork-barrel projects that were ever put in a single bill. It contains funding for no less than 678 specific different projects. For example, $50 million for small business association national resources development grant. That's a program to fund tree planting . . . . Another one adds a billion dollars for the community development block grants.

Now most of this won't be spent until 1985 and, as an example of that, in the 1974-75 recession most of those job training programs or job make-work programs never really got under way until about 1978, and by that time it was over. None of the $200 million for the Economic Development Administration would mean a single new job until at least a year from now. The Defense Department says that $400 million proposed for family housing projects is more than twice what can be justified as actually needed.

Now here's another thing. If where jobs are created, the price tag for creating them is far more staggering than anything in the private sector. The GSA, general services, federal building projects, $25,000 per job. For every job in the federal prison construction, that's another one of the things that's been proposed in those 678, for every job, $614,000, for every operations and maintenance job under the Bureau of Reclamation, $49,000.

Q: Does this mean you'd veto a bill that had any of those things?

A: I made that promise yesterday to the leadership meeting, that yes, if that came down here as a part of the continuing resolution, even though it would bring the government to a halt, I would have to veto it . . . . And I must say this, that our Republicans in the House stayed solid as a rock in opposing this sort of thing.

Q: Mr. President, you were talking there about the $5.4 billion plan but the Senate got it down to slightly more than a billion. Are you talking about vetoing anything, are you in no mood to compromise about anything, or are you simply talking about the version that the House passed?

A: Well, I haven't had a chance to see what they're suggesting, but I sure want a solid look at it and I'm going to keep faith with those members of the House that stuck by us.

Q: You talked a great deal in the campaign about how your program would offer these incentives for American business to begin to do the things which stimulate economic activity. Are you at all disappointed in the way business managers in this nation responded to this program?

A: No, not necessarily . . . . When I first in the campaign presented in the city of Chicago the overall idea for what became our economic program, by the time that the election, or by the time I was elected, the situation had so changed and the economy so worsened that already the figures that I had used in that original presentation were out of date. In January we then revised and presented -- based on all the economic projections at that time -- but who could foresee that the pulling down from the biggest increase in the money supply that had ever been permitted in this country in the last half of 1980, that when they pulled the string on that and pulled it down, they would pull it so far and hold it so long that by July the interest rates were still up there high because there was just a lack of money, it was supply and demand--

Q: So it wasn't these business managers?

A: --and there came the added recession. Now, as I've said, the recession is the main factor. But now we have . . . seen the repeated reductions in the interest rate. We've seen as those reductions began the upsurge in two industries particularly, one slower than the other, but housing and automobiles were the two big industries that then led the march in the recession in going down.

All right, housing is up in November 25.6 percent over October, and that gives us a figure for housing starts, building new houses, that is 67 percent greater than it was in October a year ago. And permits are up, building permits higher than that. The sale of new houses, already existing new houses, in the last six months has been up 45 percent.

We hear a great deal about the bankruptcies, and there were, failures of business, 27,000 of them and so forth. But there were 600,000 new business starts last year. These are new businesses going into operation.

The last to recover, tragically enough, will be unemployment. But we think we laid the foundation in these first two years, it isn't even two years yet, we think we laid the foundation for a real recovery. And I emphasize real, because in the seven preceding recessions since World War II they were all treated in the same way with artificial stimulants, with quick-fixes, with the job kind of programs that I've been talking about. And yes, there was a temporary upsurge accompanied by inflation increase, and then you had another recession, and each time when the recession bottomed out it bottomed out at a higher level of unemployment and a higher inflation rate than you'd had before.

We want a solid recovery . . . . You can't really cut the budget enough to balance the budget. You cannot raise taxes enough to balance the budget. The answer to balancing the budget is restoring the economy . . . and the evidence seems to indicate by all the economic indicators that we have bottomed out and can look forward to recovery. That is what will end the deficits, by increasing the gross national product in proportion to the amount of money the government is spending.

Q: You've said that you've not made a decision on whether to seek reelection. What are the elements of this decision and when do you have to make it?

A: Well, I suppose sometime next year it has to be done, the decision has to be made. I think to do so earlier than necessary then opens you to the suspicion and certainly the charge from the other side of the aisle that everything you're trying to do is based on politics, and it also tempts some of your people to base their advice on what they think might affect the next election . . . . In eight years in Sacramento I never listened to that. I said that decisions had to be based on what was right or wrong in every issue, and as long as I can I want to do that here.

Q: If you didn't run, could another Republican win?

A: I certainly would hope so and I believe this. I believe that by that time we're going to see that the program that we put in place does all what we promised--and that is a solid recovery, a lasting recovery.

Q: Does that affect your decision about whether to run again, if you've accomplished that by the time?

A: No, no . . . basically one of the things that I've always said is that the people let you know whether they've gotten tired of you or not.

Q: On Social Security, have you foreclosed the possibility of accepting a tax increase or some benefit cuts in the spirit of an overall solution?

A: . . . The Democratic opposition made Social Security, when we legitimately tried to find an answer to its immediate problems and its long-range problem, they made it a political football and they can't deny they did so for political purposes. They denied publicly that there was any shortfall when we said it would not be able to get through July of 1983. They said we weren't telling the truth, that there was no such danger. Well, we've already borrowed the first billion dollars, and it can't get through July of '83 without changes being made. But then they made it the centerpiece of their campaign nationwide in this last election.

When I saw what had happened and how successful they'd been with this, instead of continuing to fight for the program or even discuss compromises with them which they refused to do, I said, well there's only one way to make it not a political football and that is to have a bipartisan commission. Now Democratic House Speaker O'Neill has appointed his representatives, Republican Senate Majority Leader Howard Baker's appointed his. We have appointed ours . . . . If I should inject myself and give them some guidance, then it would become a political football again. That would do away with the purpose of it which was to be a bipartisan commission. We're waiting for the commission . . . whether they come in with alternatives or come in with a proposed plan. Then is the time for us to sit down in the same bipartisan sense with the leadership of the other party and say, all right, can we come together on what the commission has said in its bipartisan way is the answer to these two problems.

Q: Could I just ask you to look briefly into your crystal ball and tell us what you see happening with the Congress in 1983 and where you're going to be this time a year from now?

A: Well, I hope the recession a year from now will be much less than it is and unemployment will be lower, and I think it will be in view of the signs that we see today. We're going to continue to strive for a government that has reduced to a respectable percentage of the private sector. Maybe we've gone as far as we can go other than that structural change that I was talking about in budget reductions. But as the economy takes off I think that we'll be seeing that what we've done works. I hope that they'll recognize that inflation has come down to less than 5 percent and we want to keep it down, that interest rates are down and we're waiting for the next drop since the Fed reduced the discount rate.

And I'm still going to be trying to get along. We've got one House the Republican-controlled Senate in the Congress. They the Democrats have the majority in the other, and that means that there has to be compromise between us in the interest of the people and we're just going to, could I coin a term and say, stay the course?