But note what he's done in step 3. "When we cease to consider what the criminal deserves". He is conflating two notions of desert. (a) What punishment does the criminal deserve, on account of the wickedness of his conduct or the harm it has caused? (b) What treatment does the criminal deserve, according to whatever general principles govern how we treat people?

I don't think so. By desert he refers to (a) alone. You have extended it to (b).