I can't say for sure that their interviewing process is broken but as a user of many Google products (many of which get randomly discontinued) I will say there's something lacking.
Who do you think is building the UI and products? People that made it through the hiring process.
Just because something "works" does not mean it's optimal or even very good.
Google's interview strategy could also be to pick random resumes out of the pile, hire 10 people for every position, and fire the 9 who didn't work out. It would still "work" because enough people want to work at Google that they have a huge hiring pipeline and plenty of money for excess employees.
Worshipping Google as having a great interviews is not helpful to anyone. They can easily be doing it incorrectly.
In fact, the very data which you're talking about showed that many of their older techniques were in fact terrible indicators (brain teasers, GPA, etc.).
As for why they do this, your conclusion is kind of exactly what I got to in the last paragraph, "for lack of a better option." It's not that it works in some optimal sense; it just works less badly than the other options available, according to their business constraints.
I base my claim on my many years of personal experience as a software engineer, both being interviewed and interviewing others, discussing engineering and CS with numerous people. My anecdote: I once worked with a guy with quite reasonable academic CS skills who decided to re-implement SSL from scratch for a bog-standard webapp, rather than use a library to do HTTPS. That was not a good use of the company's limited budget, which he would have known if he had had any engineering skills (as opposed to CS skills.)
In my experience, there is little (though not zero) correlation between "good at CS" and "good at writing software commercially." The Google interview process is probably better than nothing, and probably better than their previous "brainteaser" style interview, but far from optimal.
As for what I'd select for? I'd certainly reject candidates who manifest anything like the condescending and arrogant attitude you display towards people you consider to be your intellectual inferiors. Even if you're an amazing engineer who can recite the CS in your sleep, that attitude is toxic for any team environment and will be a net loss to the company.
Google has turned interviewing into a science. They have interviewed millions of engineers, hired hundreds of thousands, rejected and later hired who knows how many, etc. Many incoming interviewees have also interviewed across silicon valley. And all along the way they've been collecting data and refining their process.
Do you have anything except your intuition to show us that the Google style interview doesn't work?
One thing you may fail to consider is that there doesn't need to be a direct and plain link between the interview questions and the work the engineer will end up doing. All that matters is whether the interview process produces a clean and strong signal that leads to quality hires.
As a person who's been through a Google interview, I can imagine many of my former co-workers performing poorly. Those are exactly the kinds of engineers I don't want to work with. I have spent too much of my time explaining basic concepts to engineers who should already be comfortable with those concepts, or who lack the critical thinking skills to be part of the conversation. So there's my anecdote.
Before telling a company how they should conduct interviews, perhaps you should gather some data.