The state Capitol building in Madison has been occupied round-the-clock by protesters for nearly two weeks. Fourteen Democratic state senators are still on the lam, refusing to allow a vote on a budget-repair bill. And Gov. Scott Walker has been called everything from a new Hitler to rotting cheese.

Yet the governor sounds unflappable. “I just finished eight years as county executive in Milwaukee last December,” he told me during a telephone interview. “I’ve dealt with unions and angry legislators. I know anytime you challenge the status quo you have to be bold—and take the heat.”

Mr. Walker’s challenge to the status quo is nothing if not bold. Wisconsin, he says, faces an immediate $137 million budget shortfall and a $3.6 billion deficit over the next two years. Part of his plan for putting the state on a sustainable fiscal path is to have state workers contribute more to their pensions and health-insurance plans, although they would still pay less than the national average for government workers.

But what’s made him a national target of rage—or a hero, depending on your point of view—are his proposals to limit the power of public-employee unions. “We have to cut money the state sends counties and cities,” he says, and “the collective bargaining changes I propose will save them more than those cuts by giving them the flexibility private employers have to control costs.”

He’s confident his plan will become law. The state assembly passed it in the wee morning hours of Friday, and pressure is building on the state Senate Democrats who have fled the state to prevent a vote. If the state doesn’t pass a budget and refinance $165 million in debt by Tuesday, Mr. Walker will have to send out 1,500 layoff-at-risk notices to state employees. Ultimately, 5,000 state workers and an equal number of local employees could lose their jobs.

“I very much want to avoid laying people off,” Mr. Walker says. But his experience as county executive taught him that “not everyone feels that way. During budget crises I would push for a couple of weeks where workers would only put in 35 hours so we didn’t have to cut jobs, but union leaders would say no. It’s reactionary.” He says there’s a gulf between the interests of union leaders and those of their members. “When they say it’s about worker rights, it’s really about big union bosses running their own political dynasties.” That’s why the parts of his plan that most stick in the craw of union leaders are the ones that would limit their power.

For one, the proposal would require that public-employee unions be recertified annually by a majority vote of all their members, not merely by a majority of those who cast ballots. The bill would also end the government’s practice of automatically deducting union dues from employee paychecks. “If workers have freedom of choice on their own dues money and a real voice in their union,” the governor says, “they may get better representation.”

It is deeply symbolic that this epic battle over the direction of government is taking place in the Badger State. Wisconsin was the birthplace of the modern progressive state in the early 20th century under Gov. Robert “Fighting Bob” LaFollette, who championed progressive taxation and the nation’s first worker’s-compensation system. In 1959, Gov. Gaylord Nelson made Wisconsin the first state to grant public employees collective-bargaining rights.

But in more recent years Wisconsin has also been an incubator of the conservative counterargument to the welfare state. In the 1990s, Republican Gov. Tommy Thompson helped push through welfare reform and school-choice programs that have been emulated across the country. By modernizing the relationship between state employees and the government, Mr. Walker, like Mr. Thompson before him, hopes to contain the excesses of the past—to enable the modern welfare state to live within its means.

Mr. Walker says that the employee rights that people care about are protected by civil-service rules, not collective bargaining. “We have the strongest protections in the country on grievance procedures, merit hiring, and just cause for disciplining and terminating employees,” he says. “None of that changes under my plan.” Mr. Walker notes that the single largest group affected by his proposal are the 30,000 workers at the University of Wisconsin who were only granted collective-bargaining rights in 2009. “If they only got them two years ago, how can you say they’re set in stone?”

It’s unclear who will benefit as this debate drags on, but his own experience in Milwaukee County suggests that a lengthy debate clarifies issues for the public. “I would go on reality tours,” he told me. “Critics would call them ‘gloom-and-doom’ tours, but in the end people came to agree with me on what needed to be done.” His record bears that out. Milwaukee County is a Democratic bastion, having given John McCain only 31% of its votes in 2008. But Mr. Walker won with convincing majorities three times, winning 59% in his last re-election in 2008.

“I won because people will ultimately respond to the truth,” he says. “There is an unseen reservoir of support out there for leaders who will do the right thing.” Other governors—he cites New Jersey Gov. Chris Christie—are proving as much.

Aside from short stints working for IBM and the Red Cross, the 43-year-old governor has spent his life as a state legislator and county executive. And he insists he is only doing what he promised voters he would do during his campaign—a contention hotly disputed by his critics.

Mr. Walker points to a campaign mailing last year by the American Federation of Teachers affiliate in Wisconsin that cited newspaper reports that he wanted to “void parts of labor contracts” and curb collective bargaining. “I was accused then of wanting what I’m now proposing, so the complaint about being surprised is curious,” he says.

The governor knows he has become a national lightning rod, but he says he was nonetheless surprised when President Obama jumped into the fray last week by saying that the governor’s proposal to limit collective bargaining sounded like “an assault on unions.” He finds it ironic that Mr. Obama criticized his collective-bargaining changes when federal workers lack the power to bargain for wages or benefits—a fact demonstrated last month when Mr. Obama imposed a wage freeze on all federal workers. Under Mr. Walker’s proposal, Wisconsin unions could still bargain for cost-of-living raises or more if approved by a voter referendum.

I ask Mr. Walker if he thinks he has staked his entire governorship on this budget bill. He dodges the question, preferring to discuss the national implications of the debate. “I could see our success providing inspiration for people trying to get serious about controlling the federal budget and promoting economic growth,” he muses. “Ultimately, we will only solve our problems if we get serious.”

Mr. Fund is a columnist for WSJ.com.