Copyright law is supposed to encourage artists to create new work. However, it's been perverted to let artists (but mostly large corporations) milk money from a single cow in perpetuity.
"Copyright law is supposed to encourage artists to create new work"
By discouraging other people from reproducing their work without permission and/or compensation, yes.
Someone got jumped on for reproducing a work at a lower quality. Whether it was a photoshop filter and/or hand placement of a few pixels doesn't matter; it was recognizably reproducing the work. This wasn't some new piece of art that got them sued, this was a particular reproduction of a 50-year-old photograph.
There's a significant difference between something like this and, well, covering a song as a chiptune. If you cover a song and try to sell that, you have to make arrangements to compensate the songwriter or rights owner. This is just appropriating an original work and hoping nobody notices.
The purpose of Copyright law is to "promote the Progress of Science and useful Arts", not make creators feel like they are entitled to total control over their work.
The question is whether the progress of the Arts, as a whole, is promoted by preventing people from creating derivative works. You act like copyright is all promotion, but there is of course an opposite effect, too, by preventing people from creating derivative works. Why do you think the copyright clause explicitly specifies that copyrights are "for a limited time"?
It's not "reproducing a work at a lower quality." That would imply that the artist was trying to copy the original but could only get those dang pixels because all he had was a 1980s era computer and couldn't do any better. That's clearly not the case.
It's a different work of art inspired by the original, meant to evoke it but clearly apart in purpose, aim, and audience.
It's like saying that "Pride, Prejudice, and Zombies" was a poor attempt at copying "Pride and Prejudice."
Just because you don't like it doesn't mean it's objectively "lower quality".