I'm firmly of the opinion that trad. songs have been edged out. I've seen a rough 50|25|25 split, in several different venues, between singer-songwriter (covers), singer-songwriter (own material) and everything else (parlour songs, novelty songs, recitations... and traditional songs). The "covers" 50% comes in several different varieties - in one club it'll be Gordon Bok and Tom Paxton, in another Keith Marsden and Jez Lowe, while in a more 'contemporary' club it'll be Suzanne Vega and Beck. I guess it could be argued that Jez Lowe (or Gordon Bok) *is* folk in a way that Suzanne Vega isn't, but if what you're looking for is traditional song there really isn't that big a difference.

As for why, I think it's a combination of novelty and accessibility; traditional song has got a reputation for being either incredibly familiar and already done to death ("Early One Morning"), or ferociously obscure and difficult ("In Sir Patrick Spens I clean forgot the forty-second verse..."). A Suzanne Vega song you haven't heard isn't going to sound exactly like the ones you have, but it's not going to sound that different; it'll go down easily.