The SSTO is a neat concept. but I'd stop well short of calling it "proven-capable." It could take off and land. That's far short of being capable of lifting a usable payload to orbit cost-effectively (though the shuttle has been far less cost-effective than originally believed) and returning a crew safely to Earth.
DC-X proved that it could handle the easiest parts of the mission. That's like me proving that my car can back out of the driveway, drive around the block and pull back in. It's a far cry from proving that I can drive from Atlanta to LA on a tank of gas.
I'm no expert, but my general sense is that a retrorocket landing probably isn't practical, however cool it looks. You have to burn a lot of fuel to land that way, and you have to carry all that fuel into orbit. Hauling that fuel means adding launch weight, which means burning more fuel and oxidizer. Every pound of fuel you need to carry is a pound less of useful payload.
The DC-X's ability to hover is also way cool, but it's of no value if the goal is to get to orbit and back, or to get from orbital to interplanetary space. You just can't beat the efficiency of a glide landing, so I'd expect that to be the re-entry plan for the foreseeable future.
But you do have a good point in that NASA adopted the One True Plan and disregarded any alternative. NASA -- or the government working through another agency -- should be looking at and seeding innovative approaches to space.
We should treat space exploration like a venture capitalist treats any new technology -- offer a little funding to a lot of folks, then more funding to the ideas that pan out. Start with a hundred ideas, winnow them down to ten, then choose the one that has best proven itself. The odds on any one approach are long, but the potential payoff is enormous.
What you lose in having to haul the mass of the fuel up to orbit you gain in only having to have "heavy" heatshielding on the tail of the craft, where the engines are. And the vertical landing in a 1g gravity well was (at the time) considered to be the hardest part of the mission, aside from hovering.
DC-X did everything it was supposed to do, including high altitude test flights. The follow-on, DC-Y, would have gone suborbital or even orbital as a development mule.
You do know what they used for fuel, right? LOH and LOX. Highly efficient and non-toxic (combustion byproduct - steam!). And damned near free to make. Combined with the very light weight (compared to the space shuttle - I believe that the numbers were that to duplicate the Space Shuttle's functionality, they only needed 1/4 the takeoff weight) of the system, you get a far more efficient system than the Space Shuttle.
Yes, I think that the DC-X and successor programs would have been a cheap and effective way to get into space (note that NASA isn't even interested in reviving the program, despite the miniscule cost - it costs more to refurbish a shuttle for a mission than it would have to fund the entire DC-X/Y/follow-on program), but there were other options out there at the time. All should have been pursued, not killed.