Composites in photoshop [Unable to drag and drop photos]

Try resetting the tools and/or preferences.
To restore preferences quickly using a keyboard shortcut:

Press and hold Alt+Control+Shift (Windows) or Option+Command+Shift (Mac OS) as you start Photoshop. You are prompted to delete the current settings. The new preferences files are created the next time you start Photoshop.
Note: Using the keyboard shortcut, preference files for custom shortcuts, workspaces, and color settings will also be reset to default.

from here:

https://helpx.adobe.com/photoshop/using/preferences.html#restore_preferences

I can even drag pics into it from other software, like FastStone Image Viewer. I have it set so it will become a Smart Object.

I drag the pic over PS in the taskbar (don't let go) until it gains focus. Then I drop on the canvas while holding Shift. Shift makes sure it will center and I will notice where it went.

If you have a layer selected, it will go on top of that. Otherwise it will go high on top.

?

You can do that. You'd use the Layers panel to arrange the assets in your composition and then go bananas from there.

There are a couple of ways to bring images in for compositing. One way is to use File > Place Embedded (if you want to keep things self-contained). Stil another is to simply drag an image in from another app like Bridge right into your document.