Got some cheap Atmega8-16PUs cheap along with a USB to serial dongle for programming the chips.
The configuration passed the loopback test.
I connected it like so:
RESET - 1 - DTR
RXD - 2 - RXD
TXD - 3 - TXD
VCC - 7 - VBUS
GND - 8 - GND
I selected the correct COM port, Arduino NG (Atmega8), AVR ISP. But when I try to burn the bootloader or upload a sketch the error: "avrdude: stk500_getsync(): not in syn: resp=0x00".