The Washington Post's Steven Mufson explains that a) total government debt has hit WWII levels and b) the debt problem is much worse now. Mufson argues that we are unlikely to see the kind of economic growth and inflation that brought down the debt incurred in WWII .
The problem is actually even worse than that. We are not going to see the kind of sharp spending cuts we saw at the end of WWII. There are several reasons for this. First, some significant demobilization was very popular. We can argue about whether the defense budget was cut too much as a percent of GDP, but there were enormous and uncontroversial savings in cutting the military. The US military is now a much smaller percent of GDP, and while some cuts might be needed given our current situation, cuts to defense spending would have to be both gradual and prudent. Defense might be due for some cuts (though I want to see some details and some thoughts on how the cuts affect global stability), but we shall not be saved by defense cuts.
We also won't be saved by the higher (by our standards) inflation rates of 1946-1948. The key drivers of our debt at the federal level are Social Security and Medicare. The structures and political incentives built into those programs leave them both practically inflation-proof. Social Security benefits are indexed to wage increases and any inflation will eventually be reflected in higher nominal wages. The more we inflate, the more Social Security we will have to pay. Medicare looks more promising, but in reality is just as bad. The federal government sets reimbursements for Medicare. Now technically, if we had high inflation and if the federal government did not increase Medicare reimbursements (or just increased them more slowly than inflation), we could inflate our way out of some of our Medicare-create budget problems. The problem is that there is no reason to expect such a thing to happen. Medicare costs are already increasing faster than inflation for the simple reason that a) if Medicare reimbursements become too low, medical providers will stop providing services to Medicare clients b) Medicare clients want to receive services c) Medicare clients vote. If the political will existed to set reimbursements at a sustainable level (or to establish a more consumer-driven system), we wouldn't need inflation, and inflation will not remove the political incentives for ever increasing Medicare reimbursements. Inflation might do some good in eroding the real value (and therefore the costs) of some defined benefit government-employee pensions, but it would increase US borrowing costs, not deal with the main drivers of the federal deficit and bring other problems besides.
So are we screwed? Probably. There are worthwhile policies for dealing with the Red Menace, but there are huge problems in enacting them. Part of the problem is public opinion. A linked problem is that the institutions of the center-right are not well organized for advancing a policy-oriented agenda for dealing with the Red Menace.
Hopefully more later this week.