elm-live src/Main.elm -u -- --output=elm.js definitely works whatever the number of path segments in your URL if you have an ./index.html file.
You most likely forgot the slash before elm.js in <script src="/elm.js"></script> in your index.html.
If you use <script src="elm.js"></script> instead without the slash, it will try to load the javascript file relatively to the current directory, which is ./blog/ when loading localhost:8000/blog/42, therefore trying to load ./blog/elm.js. This is the expected behavior with any server.