First some elementary things which people like Smith and Sheppard really should check before going into this stuff. All climate trend work is done in terms of temperature anomalies. For each station a base average for each month is established over some base period (1961-1990 for GHCN). For each month, the anomaly is the difference between the average for the month and the base average. So the base average takes out the effect of location, and just reports whether, for that station, the temp was higher or lower than "usual". This is vital in establishing a regional or global average - otherwise you really do have to worry about whether you have a fair distribution of hot and cold places. That is hard, and its why you'll see few references to a global temp in deg C.
So selectively dropping cool stations would not at all make global anomaly bigger or smaller.
The other elementary step is to enquire why the stations were discontinued. The NOAA explains their station selection thinking here. Zeke expands in his post. The bottom line is that GHCN was a historic database. It could include many more stations because it had years to process the data. But once you start trying to maintain such a database in real time, it's much harder. Data doesn't come preprocessed and checked down the wire from much of the world. A lot comes in print, and has to be digitised. You need to rather carefully work out just how much you need. That's why NOAA did not try to keep up many of the stations that contributed to the historic network.
Anomalies and Zeke's analysis.The basic study of the independence of anomalies from local topography etc was Hansen and Lebedeff (1987). It showed that over a period of time, anomalies correlated well over distances up to 1200 km and more, without taking account of long term average temp. That means that you can indeed select representative sites without trying to balance this factor.
I'm still not convinced by E.M.Smith's claim that discontinued stations are cooler. But suppose they are. Does it make a difference? Zeke says no. Here's his plot, showing that if you take stations currently reporting, and compare with stations that have a long record in the GHCN database but do not currently report, then there is no real warming or cooling effect.
And to show that the high-latitude altitudes still get coverage, here's his distribution of reporting sites:
In the course of the WUWT thread, I did check one Sheppard/Smith claim in detail. They scoffed at the representation of Bolivia, showing this map:
“There’s a wonderful baseline for Bolivia — a very high mountainous country — right up until 1990 when the data ends. And if you look on the [GISS] November 2009 anomaly map, you’ll see a very red rosy hot Bolivia [boxed in blue]. But how do you get a hot Bolivia when you haven’t measured the temperature for 20 years?”
Well, we see a big red patch around Bolivia. It seems uniformly pretty warm, and if that applies to Andean topography generally, it seems suggesting that Bolivia was warmer than usual is not unreasonable. So I looked around for stations near Sucre, Bolivia, and found:
A good range of altitudes there. The Dist is distance from Sucre. Arica is by the sea (desert); others are inland. The anomalies show some variation, but they are all pretty warm, as the red patch suggests. No reason to expect Bolivia to be different.