The IFS's Paul Johnson says (pdf):

Real median household incomes will be no higher in 2015'16 they were in 2002'03, more than a decade without any increase in living standards for those in the middle of the income distribution. We estimate that in the period 2009-10 to 2012-13 real median household incomes will drop by a whopping 7.4%.

History suggests this could have nasty consequences. Benjamin Friedman has shown that (pdf):

Economic growth'meaning a rising standard of living for the clear majority of citizens'more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy'But when living standards stagnate or decline, most societies make little if any progress toward any of these goals, and in all too many instances they plainly retrogress.

A new paper provides micro-level evidence to corroborate this. It looked at the impact of lottery wins on personality and found that money makes us nicer people:

Unearned income improves traits that predict pro-social and cooperative behaviors, preferences for social contact, empathy, and gregariousness, and reduces individuals' tendency toward negative emotional states.

The danger, then, seems clear. Economic regress might mean social regress - more conflict, anti-socialness and intolerance.

But herein lies a puzzle. There seems little evidence - so far - that this is happening (Clarkson and tram woman are of more interest to the psychiatric than the social sciences). Crime hasn't risen much, the far right is a nugatory force, and people seem to be quite happy; I'm not sure whether August's riots count as evidence here or not.

Which raises questions. Are there some mechanisms which offset the above tendencies and so cause economic stagnation to not have such adverse effects - some combination of peer effects and path dependency perhaps? Or am I misreading the evidence? Or will things change as I fear? I honestly don't know. But I do know that this, rather than a few tweaks to fiscal policy, is the key issue.