I have a hard time understanding how this even needed to happen. The family should have been booked to sit together from the get-go, the airlines REALLY need to step it up there. This happened to my brother last year when he flew with his family, I don't recall if he got it revised before the flight or if it had to be resolved on board.
As for the original recline question. When I went to Mexico 2 months ago, I left my seat upright. That position was more comfortable for what I wanted to do during the flight (watch a movie I had cached on my tablet).
I agree that this is all a result of people wanting the lowest fares possible, but the airline also has to consider safety. The planes are certified for a maximum weight and also a maximum number of people that can egress within 60 or 90 seconds in an emergency. Pack too many more on some of these planes and you really start to hit those limits.
I will say that the MD-80 I was on was CRAMPED (milk run to Atlanta during commute/shuttle time), the 737 felt more roomy but it also was half-full.
On that particular flight, the genuine gratitude and pleasure of the family in question (rather than an arrogant or entitled attitude) made surrendering my seat to them a lot easier; besides, I had my iPod and have the gift of sleep (which means, I can sleep almost anywhere, anytime).
I will also add that I have noticed that Airbus planes tend to be somewhat roomier, whereas Boeing 737s are less so. In that context, a few inches can make the difference between comfort and discomfort. Mind you, that same difference of a few inches (when reduced) can add to airline profits.
Re safety, of course I agree with you, and cost cutting can also give rise safety issues.