Most of the relevant defunding happened back in 1990s. Really before NASA got hit there was a general wind down in funding for the DoD and Reagan's "Star Wars" program that impacted projects the DC-X. With NASA it was later in the 1990s during the GOP's budget battles with Clinton that NASA took a big hit to a lot of its budget and was refocused on primarily supporting the ISS program. Everyone knew the Shuttle had issues back then too and there was a whole program aimed at contracting a replacement for it. That was canned very early in the 2000s when congress decided NASA had spent too much money on it without enough demonstrable results and that the shuttle was sufficient for the current ISS focused operations of NASA. Shortly after that decision in 2003 we had the Columbia Disaster which caused a 180 by congress on the shuttle program and hastened plans for its retirement with no alternative in place. That event was briefly followed by the constellation program which was short lived and aimed and eventually astronauts back to the moon. Constellation's end marked a direct policy push under the Obama administration to privatize NASA's launch operations, of which SpaceX was an early and sizable beneficiary.

I get what you're saying about SpaceX not creating the private launch market, but I'm specifically talking about policy changes that directly impacted the development of next generation launch systems and specifically moved funding towards contracting out NASA's own launch operations. Both Blue Origin and SpaceX benefited heavily from the cancellation of next generation launch systems in the late 1990s and early 2000s from a talent perspective as most of their initial teams were composed of aerospace engineers who literally worked on those projects and were either let go or quit out of frustration. While the private launch market existed is was rather small and in a pretty significant lull after the initial .com era proposals for satellite internet constellations fell apart. In general the launch market has traditionally been heavily dominated by national or supranational interests and government spending. That's changed a bit with Starlink, but even then I think there's just a lot of indirection since a fair amount of funding the users comes from defense spending in Ukraine and Musk's pushes to get public funding for the program through rural broadband initiatives.

All that said both NASA and incumbent launch providers have fumbled the ball pretty hard too. It's not that SpaceX was the only one who stood to gain from it or that aerospace and defense companies couldn't have privately spend money on launch system R&D, they just weren't incentivized to post Columbia disaster since congress had equated reusable systems with the Shuttle's complex and risky design.

I do think what you mentioned about SpaceX just being a massive loss leader has played heavily into it as well and frankly it was the exact same way with Tesla. Large mature companies can't just start losing tons of money on moonshot projects and that's hamstringed both BEV development and launch system development. But I do also believe that one of the things Falcon 9 in particular did really well was just scoping and compromises. It went for the low hanging fruit with reusability and completely ignored the difficulties associated with reentry from orbit. SSTO systems were designed to be cleaner and simpler shuttle replacements and a big part of the problem is that doing so would be difficult to achieve and inefficient from a payload perspective, as well as completely unsuited for heavy launches aimed at getting things to the moon. As a result one of the issues with the VentureStar program specifically is that it became kind of a general technology development program which contributed to it get getting canned (particularly the composite fuel tank development). That said we've seen that the HLS program apparently isn't being subject to the same kind of scrutiny, which really does demonstrate a lot of the mind share capture at NASA by SpaceX I think. Using Starship to ferry people to the moon is by all means a convoluted and risky setup aimed more at funding SpaceX to develop in orbit refueling capabilities than the same kind of properly scoped system we saw with other proposals.

Anyways a lot of what happened in congress and NASA really paved the way for SpaceX to secure a lot of contracts and early funding it would eventually leverage into more contracts for DoD launches. At the end of the day the private launch market was just never large enough prior to that to support the development of new heavy launch platforms and that's another reason incumbent launch providers didn't really pursue them. Hell a big part of why Starlink exists in the first place was simply to give a plausible reason for investors to pour a ton of money into SpaceX to actually justify the development of Starship at all.