Google clearly believes that they can obfuscate identity by enough so that ads can be targeted while privacy can also be preserved.
If you don't think that all ads are bad (and Google argues that ads help make many of the sites we rely on economically feasible), then I think you may agree that sometimes, ad targeting produces more useful ads. Many of my friends have actually found Instagram ads interesting enough to talk about them at dinners. It's better to have those ads rather than random banners for things that you don't care about. Google would definitely also argue that ad targeting improves the worth of the Internet and allows more sites to offer their services for free because they can make more from AdSense.
The following only makes sense if you buy this argument:
The data for ad targeting has been abused so often that for many (most?) consumers, it's not worth it.
Google's perspective is: "we can be a responsible steward of this data for this new age of privacy-conscious ad targeting". The Chrome topics API and mathematical/statistical obfuscation are things that a blunt tool like the law may forbid. As far as arguments go, I think this is actually a plausible one. I do think Google has somewhat OK privacy controls compared to other large tech companies, and way better ones compared to bad acting small sites and ad companies/data brokers.
That being said, I don't love the concentration of power (that's why the DOJ is going after them) - I'd much rather there be some decentralized way to ensure privacy but still allow useful ads, but we get what we get.