Spreads of 1/2 twenty years ago actually sounds pretty small. I did a lot of daytrading in 1997 and lots of stocks had spreads of a point or more. Large stocks typically had a spread of 1/8, expanding to a 1/2 during high volume. Today, HFT has driven spreads down to one cent. I agree with your facts, but I don't agree with the picture you paint.
In my opinion, the two major events that shaped the US daily markets are: the introduction of SOES trading in 1988 and the introduction of 1 cent increments in 2001.
SOES basically created daytraders. Daytrading reduced spreads from 1 to 2 points down to 1/8 or a 1/16. It wasn't feasible to get below 1/16 because the markets didn't allow arbitrary increments (you could get 1/32 but everyone hated that). By the time I quit, markets were toying with introducing 1 cent increments.
One cent increments created HFT. Now we have tons of liquidity and spreads are typically a few cents. However, this hasn't done squat for investors. Daytrading produced plenty of liquidity for any reasonable investor. If you're worried over a 1/16 spread then you're not making an informed investment decision.
As I was writing this post I just closed out a short-term trade (not even an investment). I put in my sell order at 67.90 and got filled at 67.91. 1 cent on a point trade. I don't give a shit. That kind of liquidity serves no purpose. Paying $5 less commission or saving a few cents on the spread is nice for me, but these piddling items are not going to affect anybody's investment decisions.
SOES gave us small spreads; HFT is giving us market instability.