I'm not sure what to say anymore. Lucas has always had questionable taste, but his lack of hubris in the 70s meant he was willing to accept criticism and surround himself with others whose skill sets complimented his own. The result was one good (THX 1138), one great (American Graffiti), and one Top 10 All Time Film (Star Wars).

What happened? Quite a few things.

Lucas seems to have lost a lot of his skills as a filmmaker in the years between Star Wars and TPM (20 years between directing films)
Lucas began to believe his own press.

I think a lot of the actors had problems with blue screen filmmaking.

CGI also ages badly; far worse than models (which will always look real since they are real. This was not as apparent in the 90s as it was today. TPM looks quite bad in 2011, but was already showing it's age when ROTS was released.

There was also no real time to reflect after each film about how to improve the next film (if Lucas secretly did feel it was a failure). He should have has someone else writing a rough draft of Clones while he was filming Menace.

When Lucas was filming Star Wars, Lucas was Luke. George is at his best when making stuff based on his life (Star Wars, Graffiti). As RLM said, there was no real reason to make the prequels - no psychological need burning in George's soul. The heart of Star Wars was Luke's struggle, which is something we could all relate to. Star Wars was about the story, and it is clear that the main reason the prequels were made was because George wanted to realize his dream of creating a photo-realistic world with CGI. When he made Star Wars he wanted to tell a story, and was frustrated because he felt that the special effects (as a tool) were not good enough to help tell the story. The story was always central though.