(And non-Jews should view each other this way too. The world would be a tremendously better place if all non-Jews viewed each other—and us—with the correct perception: tzelem Elokim—God's Divine Image.)
So here's the transcript of Rav Avigdor Miller's lecture on the topic (emphasis mine):
Mankind is beloved because they were created in the image of Hashem.
The mishna says openly that all human beings have a tzelem Elokim.
The truth is, if you take an Australian bushman, a wild fellow, an Aborigine, and you train him, he can become a mensch; he can become a great man, he can even become a big tzadik.
As long as he is a human being there is no limit to the greatness he possesses within him.
Hashem breathed into him a neshama and he is capable of becoming one of the greatest men that ever lived.
Of course he doesn’t know it and that is why he doesn’t do it.
But that’s the plain truth: חביב אדם – Mankind is great because he was created in the image of Hashem.
* * *
But always we remember that every human being has on his face the image of Hashem.
And so when you look at any person you must have respect.
When I was in Slabodka, they refused to call a goy a sheigetz; a sheigetz means an abomination – they refused to say that.
We never called a goy a sheigetz because it is a contradiction to the doctrine of the glory of Mankind’s greatness.
After all, Rav Miller describes walking past the yard of a primitive pub the morning after the Lithuanian locals indulged in a night of hard drinking.
And these were poor people with children who barely had enough money for food.
But they spent it on alcohol.
And Rav Miller describes seeing piles of men and women lying on each other, passed out and splattered with vomit after drinking so much.
It's so lowly and degrading.
And those Lithuanians natives were very quick to pull out a knife in anger. The local newspapers regularly reported stabbings.
Isn't all that abominable behavior?
Yet even living among such people, the Slabodka yeshivishers refused to call them sheigetz.
Despite the abominable & animalistic behavior of these Lithuanian peasants, they still possessed a tzelem Elokim and therefore the potential to rise to the pinnacle of human potential.
So the Jews of Slabodka yeshivah refused to call them sheigetz.
The rav continues [emphasis mine]:
And that is what the Mishnah says, חביב אדם שנברא בצלם – Mankind is cherished by Hashem that He created them in His image.
And if we can spread the news to the world, we are doing them a great favor; we are letting them know the message from Hashem, that He looks upon you with a very great affection because you are the image of Hashem.
The fact that a person can ruin that image by wrong emotions; that he can twist his face in wicked grimaces and make his face the opposite of noble, nevertheless if he would learn, if he would be trained, you can take that savage and you can make out of him a noble personality.
And he can become a Jew too.
But even if he doesn’t become a Jew, he could be become a chassid umos haolam [a righteous person from the nations of the world] and he will become worthy of chayei Olam Haboh [life in the World to Come] – and that is saying a lot.