>How can we reconcile AI coding a functional X server with the assertions that AI is overrated and we’re in a bubble?
Simple: AI is not overrated at all. Might still be a bubble though, that's an entirely different consideration.
Something is still holding us back though. One would think that we'd have a dozen total rewrites of Linux at this point.
Hobby OSs are dime a dozen but rarely go further for the simple reason that there is little motivation - you need programs to run, which typically means ABI compatibility, and you end up in a quagmire of writing drivers, with few benefits to show for it that you can't get by building something on top of an existing kernel instead.