We need to focus more on economics and why free-market principles are the best way for the economy
Most Americans don't support "free-market principles." I doubt McCain would have carried ten states if everyone had voted solely on economic issues last year. Of course, you're also right in noting the long-term decline of social conservatism, so I'm tempted to just say you're screwed and leave it at that. 
Honestly, though, if I were a Republican strategist, I would keep waving the flag and screaming about "pansy-ass, tea-sipping" Europeans and scary brown people. The political climate is bound to get better for the right eventually, and this formula will work (again) when that time comes. Becoming some kind of half-assed Libertarian Party would lose a lot more votes than it gains.
I would be inclined to concur as well. If the economy even becomes tolerable and Obama is still President other areas outside of the South could see a shift towards the GOP. I've harped on Philadelphia, but I've also heard urban whites in places like Cleveland, Detroit, Pittsburgh and Cincinnatti having similar sentiment. Unfortunately, race pandering works both ways and quite well in some areas for both major parties.
