I agree with your assessment that the distribution mechanism is broken. When it comes down to changing user behavior or refactoring algorithms, it's clear to me that user behavior won't change. Nobody really flags. They complain that there isn't an incentive to doing so, but if you look at it long enough there is, but that if you can get beyond ROI-centric views. Most folks wont.
Which leaves us with refactoring the algorithm. In my opinion, we are suffering from a nothing-at-stake problem where users can behave in undesirable ways because they have little to lose. If we increase the downside (beyond flags) so that risk comes into play, then low effort milking becomes harder to do, because something is at stake. But of course such an idea would be massively unpopular because freeloaders gotta freeload.
I agree nothing at stake is an issue. Maybe making people pay with a % of their voting power like for upvotes would reduce the spam level.
Agree as well and we've been working to increase those stakes using off-chain tools. For example, running flag campaigns against a bid bot abuse 4chan ripoff network on my @smartmeme alt and using the SFR bot to claim upvotes for flags w/ explanatory comments (including a valid SFR abuse category and mention as well). Some resistance is better than no resistance.
If you are interesting in being part of turning up the heat on users following abusive patters, feel free to join us at @steemflagrewards. We're a flag happy bunch but we do strive to be reasonable.
SFR Discord