Google does what is in Google's best interest, and until there is a viable substitute for google (which there may be in the future) they can dictate terms that are in many cases hypocritical and or simply designed to undermine their competition and or get you to spend more money on Adwords and less on SEO. They are protecting their business just like Microsoft protects itself by bundeling everything they make into windows.

This marking paid links is just nannying. Every publisher or journalist has an angle, so whether there is money involved or not, the reader should be responsible for judging the "recommendation" value of a link. David Letterman plugs local businesses, bands, etc on his show and everyone knows it's a paid promo, but the "link" still has some interest and value because of who is making it.
Letterman would probably not recommend a business or product without some kind of benefit for themselves, we know that. And readers of websites of course know that webmasters are not Daoist saints either.

In any case, how is clear indication of links defined? For readers if the blog is called advertorial.com then obviously all the links might be sponsored. Or if there is a series of blogroll links and another line saying "your link here $30 a month" that is obvious too. Do readers really need a bigger flag? How about "I am mercenary and lame, do not click these links"?

Or a big warning above every set of search results at Yahoo ;)

Not sure what you're saying here -- Google is asking you to mark paid links with nofollow. Ridiculous as that is, you're not suggesting that you'll STILL get penalised even though you put a nofollow on?

I am suggesting that the best advice with Google's advice is to simply ignore them. Their webmaster advice is self-promotional, deceptive, hypocritical, and filled with half truths.

Oh, I see, they want you to mark these as Sponsored Links so that they can potentially kill your site. Yep, couldn't agree with you more.

Last week I got a call from our Adwords rep saying one of our sites has been flagged for a quality score demotion because it's a comparison shopping site. Even though it lets users compare different merchants, because *technically* all the info is already published on the merchant site, this is not considered original content or added value by Adwords.

I remembered what happened to your sites as I had a "they're finally officially evil" epiphany of my own...

It is not that they are evil, it is just that they are conflicted and hypocritical.

They cause much of the noise they claim to filter but can never reflect back on themselves when it is time for clean up.

The good thing is that I and most of my friends are good at spreading marketing messages without needing Google. Google is just a backfill for passive low effort low value traffic (at least as compared to direct recommendations from trusted experts).