If there were no test litters, would there be a German Shepherd Dog? The creation of this breed seems to have been a series of test litters.
Is it unethical? Only if you think breeding dogs is unethical (and yes, I know, some people believe there should be no more dogs bred).
I find that there are two types of breeders that will breed closer than that - those that don't know anything, and those that think they know everything ;-)
Sometimes, that's true but not always. Close line-breeding (or inbreeding) is also undertaken by some very knowledgeable and respected breeders worldwide. They have been for many years going back to the origins of this breed.
was a result of a 1/2 brother to 1/2 sister mating (or 2-2 line-bred on Horand, otherwise known as the first GSD). A lot of progeny from Beowulf are also a result of matings with his different 1/2 sisters with the same sire (2-2 line-breedings on Hector). A lot of close line-breeding stuff going on back in the beginning. And this was carried forward for a few years in an attempt to form this great breed.
Not only can close line-breeding be used to bring out the bad traits quickly but many times it is useful in solidifying some traits and also fixing traits. It is a very common practice among breeders. And not just purebred dog breeders. We're also talking about livestock, cats, rabbits, racing pigeons and the list goes on.....
The problem is more about when TOO much close line-breeding happens within the same lines.
To the OP - here's a nice article regarding ---> Inbreeding & Pedigree Dog Breeds
by Malcolm B. Willis, PhD. I think you will find this an interesting read.