The problem was that Sandy was being made fun of in the grocery store and other public places because of SpongeBob's jokes. I don't think she would have had a problem with him making those jokes had people not made fun of her in public, because she knew SpongeBob himself wasn't doing it to make fun of her, but because his audience liked the jokes.

I don't think it was a metaphor for racism. I think it was more of a metaphor for bullying.
Because at the end of the episode, Spongebob did crack one joke about the squirrel and the light bulb, which Sandy just smiled at and the crowd laughed. But then he started to make fun of fish, crabs, and starfish calling them stupid as well. Because then Spongebob made it so the audience wouldn't only focus their attention on Sandy and they could learn to laugh at themselves.