Hi MooseMeister, this is a good post with lots of ideas in it that I am familiar with. Firstly, note that economists predict the effect of carbon taxes empirically, based on real world examples. The RGGI is one such example in the USA. Secondly, I understand the controversy of Keynesian economics, and appreciate just how hard it is to make scientific arguments in economics. I think conservative economists go too far in indulging in "praxeology", which Hayek himself was suspicious of. I think Hayek makes many excellent arguments, however, his ideas seem to work with some aspects of Keynesian economics which just demonstrates how complex economics is. Note that Hayek himself was not against government expenditure in things like education and healthcare. (It's in the Road to Serfdom.)
This notion that the government is always worse, or always less efficient is really an ideological issue that does not stand up to evidence. If, empirically measured, the government provides more for less, then why should we substitute oligarchs on things like internet services or healthcare or roads? Again, the emphasis for me is on the empiricism. I reject the notion that the government is simply less efficient, and in this I agree with both Hayek and Keynes.
I spent 10 years working in the "real world" including 5 years running my own small business. (Five employees for which I felt a tremendous burden of responsibility.) I have worked inside and out of the government, and can attest that it is very similar to large corporations. But I know that that type of personal anecdote is not evidence, and to date, I've found from personal experience that experimentation cuts through a lot of attractive ideas. So I'm not just an academic sheltered from the world, and have the personal benefit from a wide range of experiences.
The reason why science based environmentalism improves the economy is because it forces businesses to own externalities. Note how you completely missed this point. I agree with you 100% about false demand and subsidies, and as such, have am a strong believer in markets. However, we *must* make sure that businesses aren't pushing their costs onto the powerless and onto the commons, which in aggregate makes them far less efficient.
I agree that there are problems with measuring debt as a proportion of GDP; however, the as a rough *rough* measure it is okay. For example, Spain's debt was about 35% of GDP, which surely must be a better situation than Japan.
I disagree with Krugman who believes that debt is not a problem. But its not a short term problem, and the deficit spending hypothesis of Keynesianism has not been disproven, and does have some provisional empirical support. I've noted that liberal governments around the world (and in the USA) seem to do a much better job at balancing the books and paying down debt when times are good than conservatives, who have some bizarre notion that tax cuts just pay for themselves despite evidence to the contrary. So even if deficit spending is problematic, it is fine with me if the same people actually pay down debt when times are good, and that is what I see happen from Keynesians.
When you say the "whereas government and academia NEVER does." -- that is a black and white statement, and therefore certainly wrong. The government in the USA has a very long history of funding research that is in essentially everything you see around you. The free market is great, but not perfect, and that is what the historical record says quite clearly. But I'm not arguing for government this or government that... but a balanced and nuanced understanding of the complex issues. The efficient market hypothesis would have more credence with me if the labor market was more fluid, but people aren't rational, and they have things like children, and they get sick.
You only have to go back to the gilded age to realize that regulations are important in getting businesses to do the right thing. (Back then, government regulation was associated with quality... those who doesn't understand history are doomed to repeat it.) I'm not arguing that there should be lots of regulations. I think every regulation has an intrinsic cost, and should thus be subject to a cost-benefit analysis. Such an analysis is impossible when half the political spectrum believes "four legs good, government bad".
Environmentalism has been colonized by wackos, and that is a really big issue with the movement, but have some faith that intelligent people are also involved, who want to do the right thing, and have a deep understanding of the underlying economic issues. It is very easy for well connected businessmen to tap into anti-environmentalist sentiment to push death and destruction in the world and bolster their balance book. Again, this is just history. Think: acid rain, ozone whole, and tobacco. History is full of businesses claiming that rules will destroy the economy, but it never pans out that way, and addressing the ozone whole and acid rain cost next to nothing.
You say have faith in the human condition: I do. However, people are very good at coming up with self-serving logic that they are doing the right thing, even when they are not -- this cognitive mechanism is at the root of just about every problem in the world. If you just trusted people to do the right thing, then we wouldn't need courts, or police or laws, or regulations. Hobbs was correct about the leviathan.