I have some quibbles with your other points, but this I agree whole heartedly with. The best way to balance honour is to make the AI stronger at war so you need the military bonuses to conquer them. The problem is that this is an incredibly hard thing to do. To hard for anything but a competent and dedicated Firaxis or a huge group of modders. What I'd like, and I wager many others, is a slight hack which slightly changes honour to make it useful in the current AI environment.