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I'm glad that people who are trying to game the formula are being pushed farther down the results list, because I use Google all the time and would hate to see it wither (or become irrelevant) because people are cheating.
Splogs are obviously trying to cheat, but things like PayPerPost trick good bloggers into doing something similar. Since it's not illegal under US law, Google can't have them shut down...and appealing to bloggers to stop using PayPerPost probably wouldn't do much good, either. So, Google just hurt people outright for using it.
You should be at the top of the results list if you have the information people are searching for. If you're not providing that information, you don't deserve to be at the top of that list.
I understand the motivation to be at the top of that list - people clicking ads on your site, when they visit - but I don't think that trumps the ability for people to find what they're looking for.
Am I looking at this improperly?
Google is just protecting their best interests, having the most relevant search engine. It makes you wonder how they tell what a paid text link is and what a blogroll or other link is though.
As for spam, I'm getting hit quite hard myself at the moment, but doing the behind the scenes work clears it up. I don't see the point in taking out nofollow though, having nofollow won't stop the spammers. If you're using the original dofollow plugin, you could consider swapping to one that removes nofollow after a number of days (so that any spamments that slip through don't get nofollow removed before you can remove them) or another one I heard of recently which removes nofollow after a commenter has made 3 comments or more, so that it rewards regular commenters.
Phil - from what I gather on the comments on other sites - there is a human element involved now, as in Google employees looking at a suspect site for evidence of paid links.
So yesterday, I made sure nofollow was on in the comments, and the most recent commentators sidebar. To balance this out, the links in my blogroll and the "top commentators" sidebar are clean. I think that's an okay balance.