Another way of looking at this is that both Wolfowitz and Bolton are being given jobs that are further away from the policymaking nerve center. Instead, they're being shipped out to institutions that the President doesn't think are important. Potentially, at least, what's going on here is that they're being kicked upstairs, and this is the way a man who doesn't like admitting to mistakes is admitting that he made mistakes. Even if this is right, these aren't measures I approve of, because I think the UN and the World Bank are important and there's every reason to think Wolfowitz and Bolton will ill-serve the interests of the United States and the world in those roles. Still, I think these could be bad moves that are part of an overall positive development.
All of Bush's second term appointments have followed the same pattern: loyal operatives close to the President (or close to those close to him), who strongly shared and/or shaped his views in the first term, have now been sent out to various posts, Gonzales to Justice, Rice to State, Bolton to the UN, Wolfowitz to the World Bank, to implement different aspects of his agenda. The "kicked upstairs" argument seems appealing merely for being counterintuitive, but that sort of analysis has never proven very productive with this president.
The appointment I find personally most galling is the one which may at first glance seem the least consequential, that of Karen Hughes as undersecretary of state for public diplomacy. Hughes is a close personal friend and adviser of Bush's, has no apparent knowledge or experience of the Middle East or Islamic culture, and has been known to wear yeti costumes on TV. She is also a bullshit artist of the first order, someone who can always be counted on to present a self-serving "interpretation" of events which even Mohammed Saeed al-Sahaf couldn't sell with a straight face.
Call me a starry-eyed idealist, but it seems to me that this is a time for serious public diplomacy, for dialogue carried on by competent, open-minded individuals, not cornpone apparatchiks like Hughes who view "diplomacy" as a one-way street, a method by which BushWorld(tm) can be marketed like a damn soft drink. And Hughes' "shucks, I'm just a girl from Austin" schtick may make Tim Russert and Chris Matthews wag their little tails, but in the Arab media, where reporters tend to, you know, be skeptical and ask inconvenient questions of American politicians, I suspect it will be received about as well as a fart in a car.