Townes Van Zandt – Pancho And Lefty lyrics

The song is autobiographical, in a sense. In the first verse Townes is speaking to Himself (both Pancho AND Lefty) in the 2nd person.
Pancho appears in the 2nd verse, in the 3rd person, and represents how he felt about the hard living younger version of Townes.
Lefty is introduced in the 3rd verse, also 3rd person, and represents what was left when Townes' original dream for himself was replaced by the reality of what he had become.
The song is set, first Mexico, then in Cleveland. Both are stereotypical representations of how Townes viewed himself at different times in his life.
The outlaw image of Pancho Villa fighting authority in the harsh Mexican desert represents his earliest years, while the image of Lefty, no longer able to perform (sing the Blues) as he once did, is relegated to a lesser role in, of all places Cleveland.
Townes blames the older Lefty, who was more interested in drinking than music, for "killing off" the wild young Pancho and therefore much of the source of his music (the dust that Pancho bit...ended up in Lefty's mouth), but forgives his actions (he only did what he had to do), as something that was destined, and asks for prayers (alcoholism).
The song was written in a "cheap hotel" room, with Townes sitting on the end of the bed, contemplating the stranger he saw in the dresser mirror, (who by the way, was playing his guitar "lefty"), and lamenting the failure of the road he had chosen, to keep him "clean".
He spoke to Himself; "Living on the road my friend, was gonna keep you free and clean..."

Note:
Townes himself seemed to acknowledge that this interpretation was true. In about 1988 I saw him at a show, and he was a drunken mess. Afterwards he was at the bar drinking vodka from a full water glass, when I spoke to him. I told him I was a freelance writer and wanted to hang out after closing and make some observations, but I promised him I wouldn't write anything about his show that night, that there were just some things I wanted to try and understand.
Townes looked at me through a drunken haze and said, sarcastically, "Let me guess, you want to know who Pancho and Lefty are." Followed by maniacal laughter from him and his friends. I responded, "no I already know who they are.", which was met with even more hysterical laughter.
Then Townes said, still holding back a laugh, "Ok. So who are Pancho and Lefty?" I hesitated, knowing this was the moment of truth, and preparing myself to be laughed into oblivion. "They're BOTH Townes Van Zandt", I replied.
Townes fell silent, as did the group around him at the bar, and all eyes were on him, awaiting the cue to burst out into laughter. The look on his face changed, and with clear, piercing eyes he looked at me and soberly said, " Do you believe in God?".
To be honest, I felt at first like he was setting me up for the big fall, what a strange question, in a strange situation. I eventually replied, "Yes I do, Townes".
He reached out and put his hand on my shoulder and then said, "Then you stay and drink with me".

I think the interpretation that Pancho and Lefty are both Townes is correct. Only addition I would make is that Pancho was Townes before the shock treatments that changed his Pancho personality to the Lefty personality after the treatments. The deserts of old Mexico was his mind before the treatments and cold Cleveland was his mind after. If you go through the lyrics line by line and read some of the biographical info on Townes, you will see that this interpretation matches (with allegorical allowances, of course).