1. inventory space issues
2. characters flashing
Game programing is at fault here, not the system itself.

3. it becomes the norm and people who don't want to do it are "gimped"
Wut? A system in a game is indeed meant to be used, so yes, not using it is being gimp (or not playing at all. "I'm playing a FPS and I don't want to shoot!")

a good design choice would be to force players to think about the best gear for their style of play PRIOR to starting battle.
The good design choice is indeed to have things that have to be decided before battle, and things that can be changed during battle. Thanksfully, that's what already exist in every RPG (FFXI included. Stuff isn't the only thing determining your strategy)

PS : I don't give a damn about having gear swap in FFXIV or not