The short version: there were moles and spies in the US government. Alger Hiss, for example, actually was a spy, as later Soviet records revealed (VENONA in particular).

BUT this had nothing to do with McCarthy per se. McCarthy wasn't right — his numbers were just made up as far as anyone can tell, and he was a demagogue taking advantage of a lot of things. (Hiss was forced to testify by HUAC, a different body.) His allegations were not based in solid intelligence at all.

So it's a complex, mixed bag. Some of those accused of being Communists really weren't. Some actually were active spies. Some were people who had once been Communists (or "fellow travelers") but weren't by the time they were accused. There were actual espionage rings, but they were a lot smaller and focused than what McCarthy alleged. McCarthy himself was a demagogue taking advantage of political circumstances. But there still were actual spies.

This version of the story is much more complex than what we might call the "simple leftist" take (all a witch hunt) or the "simple rightist" take (totally justified and true). It wends right down the middle and makes everyone kind of unhappy (the way most true history does). It has been argued that part of the cause for this polarization was the secrecy that actual intelligence information on espionage was treated with — it created a vacuum into which a demagogue and broader fears could flourish, which at the same time allowed those on the left (influenced in part by CPUSA/Comintern propaganda) to say the whole thing was a sham. But the reality was that there were spies/networks, but they were relatively limited in scope and influence. Hardly surprising, really, that such would be the case. Did some innocent people (depending on your definition of "innocent," which can range from "totally unconnected to Communism" to "dallied in it in the past but was never any kind of spy") get sucked up in the maw of the search? Definitely. Were they all innocent (again, depending on how you define it, but including actual espionage)? No.

On this (and VENONA's relevance), Patrick Moynihan's Secrecy: The American Experience is pretty readable. For details on actual Soviet espionage/influence efforts, the Andrew and Mitrokhin's The Sword and the Shield is good, as is the Weinstein and Vassiliev's The Haunted Wood.

The idea that China was 'lost' is in itself sort of based in a Western misconception. It was rooted in a protestant missionary perspective that held that where Christianity went, a free market would follow. Henry Luce, the founder and owner of Time Inc., arguably the most influential private citizen of the 20th century, very much helped to plant this idea in the minds and hearts of American's. He attempted to equate Chinese desires and attitudes (democracy, free market, Christianity) with American ones. This goal manifested itself most strongly in Time's zealous support of Chiang Kai Shek and his KMT party. Chiang appeared on the cover of Time magazine on 12 different occasions and his role as a capitalist, military leader, a Christian, and, perhaps most importantly in the years immediately following WWII, almost sociopathically anti- Communist. What Luce failed to mention is that the KMT under Chiang was abysmally ineffective, both militarily and politically. He alienated the rural population as the Communist party simultaneously gained its support.

I mention all of this because Luce was, in large part, responsible for creating these attitudes toward Communism, particularly in China, as the enemy of a strong ally East Asia. China wasn't lost at all, it was just never won.

Source: independent research of Time Inc. Materials as Primary sources Varg, Paul A. 1958. Missionaries, Chinese, and diplomats: the American Protestant missionary movement in China, 1890-1952. Princeton University press, 1958. Baughman, James L. Henry R. Luce and the Rise of the American News Media. Boston: Twayne Publishers, 1987.