This is not the problem it's made out to be:
1. An application running as a different user can only connect to the X server if it has access to the .Xauthority file. This means there's no risk of having another user connect to your X session and sniff keystrokes, unless you explicitly chmod o+r ~/.Xauthority.
2. One should never run untrusted applications.
Now, I will grant that better GUI process isolation and/or granular X permissions would be useful, in that it would lay the groundwork for a safe way of allowing an untrusted remote (or local) process to display a GUI on the local X screen. I've also always wished window managers would highlight windows from a different user with a red border, mostly so I could tell which file browser window I'd started with sudo.
So, what applications do you trust, to never, under any circumstances, get subverted by third parties? I don't know about you, but I personally find it hard to have that level of trust in anything that's written in C, and talks to the network --- but without any of those, these days, you're left with a pretty spartan and uncomfortable environment.
Besides which, allowing any app to read any other's keystrokes, without special arrangement is a pretty clear violation of the principle of least privilege. It may have been appropriate for research environments twenty years ago ("hey, the window manager can be just another app! isn't that neat?"), but Rutkowska's quite right to say that it's not good design for the world that we're living in now...
Security through omniscience? Is that any kind of answer? This is a whole that can be plugged.
This problem has in fact been solved by the X security extension. The problem is that nobody tests their programs as untrusted clients. GTK, for instance, will more or less immediately abort because its error checking consists of assert(trusted_only_operation()).