Digging this up to avoid creating a new topic:
i too am of the opinion that old clothes' management can use some improvements. The thing i'd find most age-appropriate would be 'clothes repair' a.k.a. patching things up. Ideally, this would be another clothier's job, where the nearest unclaimed piece of worn-out clothing would be targetted and restored to undamaged status. To ensure a 'cost' to the interaction apart from labour itself, the repaired piece of clothing could lose quality, presumably 0-2 levels (no quality loss for a masterful job, one level for a fine to exceptional one, two levels for standard work) for each wear grade removed. If an item's quality would thus drop below base, it would be destroyed, recovering the cloth (by material size) for patches and wound dressing - allowing a material cost for repairs and providing a type of recycling.
While this would feel fairly natural and appropriate, i'm aware it would take a serious amount of programming work: the loss of masterwork quality through patching shouldn't cause unhappiness in the clothier, neither should the subsequent destruction of a no-longer-masterful clothing item. Clothiers repairing stuff should prefer using partial cloth items for patches instead of cutting up a fresh bolt (making it unusable for making new clothes).
Still, i think that in-period, repairing clothes until they fell apart would be the most realistic approach; from the 15th century or so, unusable clothes were collected for paper-making (and that was the main source of paper until the 19th century), but even then, clothes took enough effort to make that they regularly got repaired and patched up and only discarded when they were in an untenable state. And of course, it would make keeping the dwarfs clothed less of a hassle if you could automate repair jobs and only needed to actually replace a piece of clothing every eight instead of two years, not to mention the possibility to stretch a small cloth supply by less material-intensive repairs instead of the full-material-cost replacements.
For a fairly simplistic sanity-preservation fix, treating x*clothes*x differently from *clothes* would help a lot: one possibility would be allowing sorting by damaged/undamaged status in finished goods stockpiles. Another would be an option to automatically move unowned damaged clothes to a refuse stockpile. For the latter to properly work, dwarfs would still need to let go of their claims to the X+pig tail fibre sock+Xs in their cabinets without massive player intervention, though.