Alternatively, a few of these internal TLDs (.internal, .local, .home, .dev, .lan, ...) should have been reserved from the very start and then we should have intentionally leaned into the explosion of top level domains because shoving everything under .com was always kind of dumb. (But yeah, arguably what actually happened was a little bit the worst of both worlds and we get to deal with all kinds of fun growing pains until everything is brought to the new standard and hopefully we can stick with that.)

There's a difference between something working by design vs. working by happenstance. I would argue using a gTLD that isn't supposed to be registered is working by happenstance whereas the proposed .internal would be working by design.

As an example, some (terrible) ISPs intercept NXDOMAIN records which could leak into misconfigured networks that are squatting on unregistered gTLDs. This behavior would be far worse if they did this for the proposed .internal.

Counterpoint, if TLDs were more limited then having one of those is a license to print money. The existence of more TLDs reduces domain name scarcity and is strictly better for us the users.

Yes. You couldn't just assume that a TLD that wasn't being used would forever continue being unused. .local was introduced for an RFC rather than for profit

This is one of those "damned if you do..." type deals. ICANN was created to expand the gTLD options as one of its goals.