I am in favor of the item lvl squish.
-The way I see it, gear should become more powerful as shown in the Figure 5 graph (linear) for all outdated content, and then the raid / pvp gear for the current expansion can still grow in the same way as it traditionally has (exponentially), so that as you go from tier to tier / pvp season to season, you will still earn worthwhile upgrades. Once a new expansion comes out, the last expansion would then be normalized into the linear equation of the graph, and the new expansion's gear would now grow in an traditional (exponential) way. This system would keep item levels in check as new expansions roll out, while still allowing players to progress their power throughout current content.
-As for the issue of old content: I understand that because of the item level squish, it isn't as simple as dropping the numbers of everything by X%, because you can't simply convert an exponential curve into a linear one by dropping all values by X%. Old content from (lvl 60+) to (whatever the last expansion is) would have to have all values manually rebalanced. The reason for this is that content after level 60 was designed with the exponential curve growth in mind, whereas content up to and at 60 was linear. Even if you drop 60+ content numbers (hp, damage, etc of NPCs and players) by X%, it is still exponentially higher up the curve, just with smaller values. The situation this creates is that a max level player would still be able to faceroll old content, however perhaps not quite as easily as it is now, because the current expansion would still grow exponentially like it traditionally has, except the player wouldn't be hundreds of item levels overpowered like it is now. A player who is not max level, but is also a higher level than what the old raid content was designed for (for example, a lvl 80 player trying to go through lvl 70 black temple), would have a much more difficult time and would likely need a group, because all past expansions would be normalized into the linear equation.
-My proposed solution would be simply to give a zone buff to players who are higher levels than the content they are doing. This way a player who is the appropriate level for old raid content would be able to do that content normally as intended, and a player who is a much higher level than that content would be buffed to replicate (perhaps not to the same extent as right now) having gear that is many item levels more powerful, making old content much easier for them.