To expand on this, and illustrate the dangers of speculation, would you not also establish a legitimate Certificate Authority when your lab geeks realized how critical they would or could someday be, then use your industry reputation to sell certificates like any other company in the industry?

Sure I could. Then I just need to convince ISPs (or Cisco :D) to channel traffic trough my equipment. On the other side, as a government agency with ties all over the world, decades of practice in eschelon, cryto ag, on-the-fly replacing chips on cisco equipment, unlimited founding,..

Perhaps you don't even need to convince Cisco. Just find some vulnerabilities in their OS, sit on them and pull them out when you need.

I wonder what percentage of internet connections hops through a cisco device at some point...?

Doing this completely undetected is actually harder than you think. Modern browsers check Certificate Transparency lists, and if the certificate is not present in at least two lists then they are simply rejected.

In addition to this you have Certification Authority Authorization (CAA) which uses DNS to tell what CAs are allowed to sign certificates for a certain domain.

There are services you can subscribe to that will tell you when a certificate signed by a (or anyone but) CA for a domain you want to monitor.

CAs cannot decrypt SSL traffic, or am I missing something.

CAs can issue a new cert for state-run MITM attacks.

How issuing free certificates makes it more probable?

You get a root certificate on all machines.

Considering that a majority of the Lets Encryot userbase would probably be running http rather than https if it weren't for free certs, it's still probably preferable to have only one or a handful of malicious entities able to observe traffic. You're not wrong though overall, the certificate model doesn't have built in protections for malicious CAs.

Overall I would argue that companies that are dealing with sensitive data should be using EV certs anyway to help users defend against phishing attacks which Let's Encrypt doesn't offer to my knowledge. This is tangential to your point though.