When you read someone like Bolano, or Javier Cercas, or even Villa-Matas, it's impossible to deny the good work. The only real problem is not the harry potter's bad rip offs or hybrid self-help/moving stories, but the fact that originality is something harder to achieve than before, and will continue to get even harder, so we'll have to ask ourselves sooner or later: what will replace originality as essencial element of contemporary art without killing it?
I think fiction is becoming better. I think that people's ideas are getting more and more creative. This is happening in books, movies and other things. People are coming up with some really unique ideas that haven't been seen before. This is hard because so much stuff has already been done.
Writing and idea generation is happening at staggering rates, higher than ever before. The accessibility of stories and entertainment has reached such levels that it is difficult to sift through all of the material. There is not necessarily worse fiction being written these days, but there is so much being put out that it is difficult to judge.
Fiction is becoming better, because there are people who have read what writers have done in the past who are building on it. The Harry Potter series is a good example of excellent modern fiction. Tomorrow, When the War Began is another example. There are modern authors who do great work.
As an avid reader, I feel that fiction is becoming worse. First, a lot of it is formulaic and authors are actually told to follow a specific type of formula. Second, no one is writing with quality and with a rich vocabulary. We talk about classics nowadays, and they were written with a lasting quality. Books nowadays are often about current topics, and it's doubtful that many will pass the test of time. I can't think of any modern authors that I would guess people would be reading 100 or more years from now, as we still do with classics.
No, fiction has become worse. It lacks substance, a strong story line, and well developed characters. Fiction used to have entertainment value not long ago. You could count on being drawn in by a good plot and an entertaining story line. Now, whether it's books or movies, it's all about horror, demonic possession, and brutal killing. Fiction has deteriorated.