Phil, you make very good points. The author does deliberately re-interpret the original passage in order to make his case - that said, we shouldn't throw the baby out with the bathwater. The US has a rather extensive history of creating terror when there is none, i.e. knowingly blaming the wrong people for atrocities. A number of wars were entered into by the U.S. around the turn of the last century (and including WWI) thru diliberate propoganda, most often over sunken ships. The Maine is mentioned in this article, and most every expert at the time and especially in later times believed it wasn't sunk by the Spanish (with whom relations were becoming quite good - and it would have been madness on their part to provoke the states in 1898) but by an internal explosion. No one posits that the U.S. did it themselves - they just took advantage of it to really start up the empire (acquiring the Phillipines, Guam, Cuba, Puerto Rico...) aided by Hearst, the Rupert Murdoch of the day.
It is indeed much sexier to use only what is publicly available to prove a point - for one thing, there is pretty much no argument that can be made. However, I think it is slightly naive to believe that there isn't anything else under the surface going on. Of course the burning of the Reichstag is the perfect example of a government "harming" itself in order to further an oligarchic or fascist cause, but there are others... Here's a page which lists a number of confirmed or suspected cases of what the author labels "The Problem Reaction Solution Paradigm" that deals with manipulation of events and the twisting of them. Personally, I doubt some the items on his list - specifically the more recent ones (i.e. what did the gov't gain thru the Oklahoma City Bombing?) but I think the important thing here is not to attempt to assign blame for the events that have happened, but to use the hermaneutic presented as a means to examine the manipulation of information and propaganda. The responsibility for many of these things will never be fully assigned to most people's satisfaction, but that aspect isn't nearly as important as the reaction and provocation of governments. This shall prove a salient point soon, as I'm sure Ashcroft is waiting on the next large terrorist attack to slide thru his bill, the unofficial Patriot Act II, which he won't even show members of Congress (we only know of its existence due to internal leaks).
In short, I agree that our author has garbled Chomsky - but that does not negate the value of his observations. And of some of his investigative journalism - Operation Northwoods gives me the willies. Living in a time - as we do - when facts are routinely distorted and lies are passed as truths, I think it is more useful to observe the patterns of action than argue the initial culpability. These are times of induction, not deduction, as facts are unreliable. Thru induction we are likely to make good guesses as to which facts are true and which aren't, but if we rely on deduction, then we are at the mercy of the machine (ie deduction - Saddam has WMD, he harbors terrorists, he must be stopped v. induction - Saddam is not aggressive now, has never been aggressive without the approval of the US (tho sometimes misinterpreted), the terrorists hate him as much as us - he's no threat, the US wants an empire).
And the induction of Chomsky and our author are roughly parrallel, tho emphasizing different aspects.