I don't think that there's anything wrong with the term, (and I loved Oh Brother, thought it was funny and thought that they did a great job in keeping a feel for rural music and yet making it accessible enough that non-purists could enjoy it.) I think the IMAGE is the problem. When I ran a folk concert series, I'd get a completely different audience when I'd book a bluegrass band. I asked the bluegrass audience as they were leaving, why they never came to folk music concerts. Their answers were very telling. They said that folk music is someone sitting in a chair, playing guitar and complaining about something. They perceived folk music as protest music. A leftover image from the sixties when folk music was often seen as a tool for social change, and "angry" sold records. The protest song focus in the sixties kinda threw folk music out of perspective, just as the inward-reflecting music of singer songwriters has given them the label of all being whiners (I hear an ENORMOUS amount of whining on Mudcat...) Folk music isn't protest music. Singer songwriters actually write humorous songs... John Prine and John Gorka being good examples.
The whole "roots music" label is a corporate term, trying to lure people into getting "in touch" with their roots. Another corporate term over here is "Americana." That is basically acoustic songwriters, as far as I can see, and another music store category to file stuff under when they don't know where to put it.
The one element of folk music that seems to get short shrift is fun. Protest songs may help draw people together with a common purpose, and have their use. But they also can separate people, rather than bring them together. Introspective acoustic songwriters (rather than label all songwriters as navel-gazing) often are too lost in their own importance to connect with others. And, they sure ain't fun. Historians have never been known to be a barrel of laughs, either. First and foremost, folk music was entertaining. If people could just relax, stop worrying about labels, stop trying to protect the purity of a moment in time, and just have a good time singing and playing, they'd draw a lot more people to folk music. Everyone (almost) likes to have a good time. If folk music was perceived as good-time music, it wouldn't be in the back corner of the music stores.
Just my biased opinion.
Jerry