Several chimed in to say that they agreed that it would be far more humane to such individuals to be honest after two years, rather than letting them face a long time in graduate school to be followed by potentially fruitless job searches. Graham Wilson of Boston University said that most programs have "moved away from the tough evaluation" after the second year of a doctoral program and that they should return to a frank discussion of potential at that point.
When I was applying to PhD programs, there were two programs I was most serious about. One is the kind of program they are discussing above. Recent graduates made it clear that they brought in more students than they intended to graduate and then sorted after arrival. The other is the program I am in now, which intends to graduate everyone it admits. It doesn't always work; students still choose to leave - or are counseled to leave, particularly after comprehensive exams. Still, I think the overall numbers would show a difference in attrition.
It surprises me, then, that the third option of being more selective up front wasn't discussed as an alternative. Do admissions committees just not think they have enough data to make valid predictions about success? Do they count on a minimum number of students (or TAs) for some reason?