The important thing to realize is that bad developers who are kept around tend to survive because they're well liked by people who make the decisions. If you raise concerns about their performance then you're picking a fight that you can very quickly lose. I've seen people get hung out to dry when they escalate concerns about people like that, and even if they were right it still leaves them in a much worse position for their next job hunt.

In most cases I'd tend to agree with OP that the right move for an employee in that situation is to lay low and start looking. If the situation isn't yet completely unbearable there's no need to just hand in your two weeks' notice, but it's worth looking for the exits.