I hate to contribute, topic-wise, when you guys are having such "lulz" with one another, but I find that the real sweet spot of a good game is one's ability to customize.
Some of you are in the "lrn2playnub" camp. You are the people who make a lanparty ridiculous and enjoyable, but I also wouldn't let you in any part of my house that wasn't my basement. (lrn2hygiene). You guys want a challenge, and these topics irritate you, because amidst the clamor for easiness, you're worried your challenge will get patched away.
And then, there is gaming's four-letter word: the casuals. These people want an experience, but don't want to be punished for their every little failure. My wife is a console gamer who has played so little on the PC that she has trouble adjusting to the WASD. I do fancy hardcore, but much like Left4Dead, if I play on hard, she won't play at all.
Look how I dwell in both camps! I am a veritable ambassador! So, I submit that we should have a number of sliders to customize one's experience on a server. This can help with adjusting the challenge level AND dealing with lag. Have a setting where the items disappear altogether. Just, blam, gone. Speaking for myself, when I play single player, if I die, I delete that save. If you play like a survivor, dying is actually a challenge.
For the casual, give them the ability to keep dropped items around for longer. They can adjust how long they stick around. If some frightened little grandmother wants to crash her server with a five minute time frame, then so be it.
Just ignore the hardcorez trolls OP. The obvious solution to this would be for Notch to add a server-side variable that allows an admin to set death-item persistence on a per server basis according to their hardware limitations. I'm sure the modding community can come up with something like this.