The full suggestion includes "This would allow ChatGPT to learn from its own mistakes", which implies that the text it generated would be evaluated and curated before being sent back into it for training. That, as well as including non-AI-generated text along with the AI generated stuff, should stop model collapse.

Model collapse is basically inbreeding, with similar causes and similar solutions. A little inbreeding is not inherently bad, indeed it's used frequently when you're trying to breed an organism to have specific desirable characteristics.