Your discussion of the Internet's future effect on government and democracy assumed that it would be within the context of the existing political, social and economic order and the power structures of our representative form of party-political democracy, when in fact it has the potential to transform EVERYTHING, by facilitating individual and group SELF-ORGANIZATION and a participatory, grass-roots form of democracy, in which party politics and centralized government, as we know them today, will have no role to play, and in which the rat race of mass, media-controlled, producer-consumer society will be no more.
The necessary, open-source software, as far as I know, has not yet been written, but once it is and becomes available, it will be possible for individuals (those who want to) to self-organize into groups, and groups into larger groups, and for individuals and groups to interact at every level. Instead of individuals being told, more-or-less, who they are, where they belong, and what their rights and obligations are (especially in respect to employers and the state; thus the on-going debate about "British identity"), they will decide for themselves. If they don't like a group they are in (and they can be in many), they can join (or, with others, can newly found) another.
The Internet will facilitate ANARCHY in its most positive senses, enabling those of us who want to, to escape for the first time since the very beginnings of civilisation, the clutches of those who would rule over or exploit us.
I haven't worked any of the details, but the direction in which we will soon be heading, I hope, is clear enough and makes me very optimistic for the future. It is the only way that we are going to create a more just, humane and above all sustainable society.