His argument is not that it costs more to run Google Reader than there is benefit, so we need the government to run it. His argument is that the benefit to society of Google Reader is greater than the cost to society of Google Reader. Outside of a free market, it is better for society to have Google Reader. Unfortunately, there is no price structure that allows Google Reader to exist as a for-profit service. The market is inefficient, and the government should step in to fix this inefficiency. Therefore, it might be useful to run some services like Google Reader as government services.

I think that Google Reader should not be government-run, but he raises a larger point. There could be some internet services that would be better run by the government, and we don't really have any today. I don't think we can dismiss that possibility. I can't think of any sites like that right now, though.