I certainly understand the sensitivity, and, art being vital to life, I don't think the comparison between telling someone that they aren't human, and telling them that their art is not art, is even all that hyperbolic.
And sure, high art may be an easy target. But I don't think either I or Holland are making exactly the same criticism that you are hearing (in much the way, if we are going to use charged analogies, that committed Zionists sometimes have trouble distinguishing anti-semitic and legitimate criticisms of Israel).
I consider the phrase "that's not art" nonsensical -- it is used 100% of the time directed at something which clearly could not be anything but art, and I agree with you -- it's used as a conversation-stopper, a "get out of saying why this art is bad free" card.
But when I find the notion of fake outsider art funny, I'm not saying it's not art. What I'm ridiculing is pretense: of insiders pretending to be outsiders. The criticism could be equally well levelled at alternative rock, or US politics, both of which also fetishize outsiderdom -- so that the most established bands snarl about sellouts, and multi-term congressfolk campaign against the "culture of Washington".
It was you who said "fake". If you'd said "the new trend is art emulating the dedication and obsession of Henry Darger", I wouldn't have found it absurd. If I'd read "fake" not as your criticism of pretense, but as the artists' own consciously intended aspect of the art (fake outsider art in the sense of a hoax intending first to be taken as outsider art, then later revealed to the viewer not to be) I wouldn't have considered silly, but quite interesting (even if I wouldn't be quite sure, at first, whether I approved or not).
Mocking a genre of art for being pretentious is not denying that it's art (in fact, if intended as legitimate criticism, it's affirming that it's art), nor is it even dismissing it. 70s art rock is pretentious, and I could be certainly goaded into saying many snarky things about it, but I still like me some 70s art rock. I can be found here and elsewhere in the blogosphere making fun of the pretenses of the "nerd rapture" Singularity, but I nonetheless write (sorta) post-Singularity stories myself.
I will admit that you're right about the word charlatan, and hereby I take it back (again, you did offer the word -- but my fault for taking it). I don't seriously think that any contemporary artists really think of their art as props for a con job -- even those who might claim to, to be provocative or seem worldly-wise (Warhol? KLF?).
I don't think that Holland's essay, though, is accusing anyone of charlatanry either. He is mocking various kinds of art for what he sees as their various pretensions, but even as he mocks their grand manifestos and intended solutions to the problem of Art, he seems quite fond of artists.
"Put them in the kind of utopia they sentimentalize, and in no time, they would be binding their feet, lengthening their necks or flattening their heads, just to be different. Artists will never be satisfied, and anyone who tries to satisfy them is a fool" -- this is clearly intended as a compliment.
Not only that, it clearly classifies all the people pursuing all these forms of art as artists -- the people who are never satisfied. I read him as mocking the various genres' pretensions, unexamined assumptions, and fetishes, not dismissing them entirely or considering all work within them invalid. But it may be that he sees one or another of them as totally bankrupt artistic modes. But even that doesn't mean he doesn't take the people working in them seriously as people engaged in making art (I think the bit quoted above about artists makes that clear); he just sees them as having gone astray.
And I don't think that criticism, even if it sweepingly indicts a whole genre, is illegitimate in the same way as "that's not art". I can dismiss spinoff Tolkein-clone high fantasy as played out and boring, and have trouble believing anyone but some perverse genius (or someone consciously mocking and deconstructing the subgenre) could make art that would satisfy me, now, out of the quest of a Chosen One who doesn't yet know that he is actually the legitimate heir to the kingdom to defeat a Dark Lord (so as of now you've heard someone dismiss a genre of fiction more recently than a genre of art... :-> ). But saying that "that set of tools will almost inevitably lead to bad art" is not the same as saying "that's not art at all".
Anyway, what I would say about contemporary art, turning aside from what I imagine Holland might mean, is that conceptual art -- not all contemporary art is conceptual art, of course -- is actually an extremely tight medium, like haiku or comedy one-liners. A conceptual art piece may be physically or temporally large or extended, but to the extent that it is conceptual art (of the kind I mean -- I may be using the term wrong, and invite correction), it's the idea of it, the notion, the gag if you will (I know it's not always a gag, but the conceptual art I like best often makes me laugh out loud), that matters. And that means that if the idea is off, if it's not interesting, then the whole thing is going to fall flat.
This means that Sturgeon's Law is going to play out differently for conceptual art and for illustration (let's posit them as opposite poles for the moment, with conceptual art being all about the notion, while in illustration the cumulative effect of detail is what matters -- even if in fact all real works of art are of course going to fall somwehere between these two poles).
A given illustration may not be inspired in its theme, subject matter, or vision, but if the illustrator is a competent craftsman there will be things to like about it. If 90% of illustrations lack brilliance, then still a great deal more than 10% of illustrations will be serviceable and of some utility. It might be nice on a wall, or useful for selling a product or getting the point of an article across, even if it will not haunt your dreams.
But for conceptual artists the curve is just going to be much sharper. If the idea is not inspired, there's not much left to appreciate. So while the common reaction to a piece of merely competent illustration is going to be "that's nice", the common reaction to a piece of merely competent conceptual art is going to be "wtf is this crap?" And I'm not sure that's so unfair.
(Sturgeon neglects, of course, to mention that the 90% thing is relative: not everyone is going to agree on which part is the crap).
It's like singers vs. stand-up comics. A decent but not brilliant singer is still pleasant to listen to, while at least my experience of stand-up comedy is pretty bimodal -- hilarity or irritation.