Basically, what you're saying is essentially true. However, the size problem is tempered by the fact that a 20.1 inch LCD screen would have approximately 4 more diagonal inches than your 17" CRT (CRT sizes include parts of the monitor under the plastic shroud around the screen, LCDs do not). This will reduce the "shrink" effect, but not eliminate it completely from your POV.
You can increase the size of icons to fix that part, but fonts are a different matter, in that I don't believe Apple will let you play w/ the font size for OSX (3rd party add-ons might help here).
Of course, if you're using a 17" CRT at 800x600, then there probably isn't too much you can do to completely eliminate the issue. May I recommend different glasses for using your computer? Even my 65 year old father can use his 15"CRT at 800x600 with the right glasses.
If none of that works, the 20.1" LCD could still be useful to you at 1024x768 (or the widescreen equivalent), simply due to the larger screen size.
Follow-up: Apple has actually been very good about preserving a consistent pixel-per-inch number (72, I do believe) across it's monitors. Hence the 22" Cinema display is monolithic, but has a punny 1600x1024 resolution. It keeps the ppi the same as that 15" you could also get, and keeps it legible. The PC world, however, has no such enforcing overlord, so things could be much, much worse. The day 17" CRTs started doing 1600x1200 I was truly worried...