This debate's been roiling over at the Prospect and I waded in with a take roughly along these lines, but I think Krugman really nails it:

Consider this: The United States economy is far richer and more productive than it was a generation ago. Statistics on economic growth aside, think of all the technological advances that have made workers more productive over the past generation. In 1973, there were no personal computers, let alone the Internet. Even fax machines were rare, expensive items, and there were no bar-code scanners at checkout counters. Freight containerization was still uncommon. The list goes on and on.

Yet in spite of all this technological progress, which has allowed the average American worker to produce much more, we’re not sure whether there was any rise in the typical worker’s pay. Only those at the upper end of the income distribution saw clear gains — gains that were enormous for the lucky few at the very top.

That’s why the debate over whether the middle class is a bit better off or a bit worse off now than a generation ago misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans — something like the plan proposed by John Kerry two years ago, but more ambitious — would be a good place to start.

The thing of it is is that in order to articulate the point properly, Democrats are going to need to re-learn the word "inequality," something that seems to have vanished from their vocabulary in the late 80s or early 90s.

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