One major argument I'm hearing is that by giving these coding projects, competent developers should be more interested because this guarantees the people they work with will be competent.

My response is that you can find out the competence of an individual without wasting 5 hours of their time on a pre-interview puzzles. If they pass your phone screen and interview, you should be fairly confident that they are a competent programmer. I'm hard pressed to believe that someone who passes famously difficult interviews (for example Palantir) would find the puzzle anything more than busy work.