Words, Triggers and Political Correctness
I think I have an idea of part of what underlies this. It's triggers.
Here's a hypothetical kid, named Timmy. Timmy was born with Down Syndrome.
His parents were told to institutionalize him at birth because 'retards destroy families'. They got angry and replied that he was their child and they loved him, and resolved to raise him the best they could.
When he was 6 years old, they tried to enroll him in the neighborhood school, the same school his older brother went to. The school refused him entry. 'We're teachers, not babysitters. Send him to a school for retarded kids.' The parents were angry, but they couldn't change the school's decision, so they sent Timmy to a special school.
Throughout his school years, Timmy would board the special bus that only disabled kids rode on, and neighborhood kids would laugh and point, saying 'look at those retards'. One time, he told them off for laughing at him, and they made fun of his Down Syndrome speaking style and told him that he talked like a retard. Timmy was so upset by this that he couldn't say anything at all.
At school, some of the teachers were nice, and others weren't so nice. The nice teachers were patient and encouraging, and seemed to enjoy spending time with him. The mean teachers tried to hurry him and got mad when he struggled, and talked among themselves about how annoying the retards they taught could be - often forgetting or overlooking that Timmy was within earshot of them as they said this.
One day, Timmy's brother came home in tears, because some of his classmates had made fun of him for having a 'retarded brother'. At first he was outraged and hurt, but he still felt the need for friendship, so gradually he stopped inviting Timmy along when he went out with his friends, and stopped inviting his friends home to meet his family. And sometimes, in order to gain acceptance, he'd laugh along with his friends when they made a joke about a 'retard', inwardly apologizing to Timmy when he did so.
Now Timmy's grown up, and he's become a self-advocate. He's arguing against institutionalization, advocating mainstreaming, speaking out against bullying, telling teachers to be patient and kind when teaching kids like him. And whenever he hears the word 'retard', he hears it echoing from the mouths of everyone who discriminated against him and hurt him. He remembers being a kid with speech problems trying to stand up for himself and getting viciously shut down, remembers anticipating walking to school with his brother and ending up taking a special bus instead, remembers feeling ashamed and frustrated when the teachers pushed him too hard and got mad at him for failing, remembers all the painful moments in his childhood when someone used that word.
My Dad is very good at imitating accents. Once, he bragged to a black South African that he could do an Afrikaans accent, and the guy said 'OK, let's hear it'. My Dad replied, in an Afrikaans accent: 'State your name, kaffer.' (The phrase that most easily came to mind in that accent.) The black guy flinched, my Dad apologized, and he shrugged it off and told my Dad that he'd done a very good job of imitating the accent.
Being the target of discrimination is a traumatizing experience. If you read the literature on PTSD, you'll find that anything that is associated with a trauma can set off painful emotions. I read of one woman who felt anxious when someone stood on the other side of her closed bedroom door - the sight of their legs disrupting the bar of light under the door made her afraid. As a child, her father used to come to her bedroom at night and sexually abuse her, and his legs behind her bedroom door became a signal of impending abuse.
Some derogatory words, such as kaffer (heathen) or faggot (wood for a fire), are derogatory in etymology, whereas others such as nigger (black) and retard (slow) are not. I know one guy who calls himself a 'slow learner', while opposing the word 'retard'. I wonder if he realizes that those two terms mean exactly the same thing. But it doesn't matter what they literally mean, I suppose. What matters is the feelings associated with them - pain and shame with 'retard' and self-advocacy with 'slow learner'.
On the other hand, some people don't have those associations. Some black people have only ever been called 'nigger' by playful black friends, so the word has playful teasing associations rather than hateful ones for them. Others have made a conscious choice to break apart those negative associations, to refuse to allow prejudiced people control over the usage of that word. If you reclaim something, it'll often lose its sting.
But keep in mind that words have emotions linked to them. If you use the wrong words, you'll scare and hurt people by bringing up pain from the past. In my self-defense class, I learnt moves to stop people from choking me. On the following weekend, I was practicing these moves with Dad, and Mom (who was choked as part of childhood abuse) told me to stop. I obeyed. I didn't think there was anything wrong with my Dad choking me with my permission, ready to stop as soon as I needed him to, but I recognized that doing that in her presence made her feel unsafe. For the same reason I didn't practice choking defense in front of Mom, I don't think you should use words like 'retard' and 'nigger' in front of people likely to be upset by them. I don't think those words are inherently banned, but you should be sensitive to the context.
Now, saying those words are fine isn't saying the attitudes that have gotten linked with them are, any more than saying it's OK for me to be consensually choked in self-defense practice is saying it's OK to choke a child abusively.