K.D. comments in my previous post on Randy Barnett’s idea of a “Federalism Amendment” to the U.S. Constitution (see here and here). On this subject, the work of Barry Weingast on market-preserving federalism comes immediately to mind. See also William Riker’s research, as he laid the basis on the issue in the 1960s.
As Weingast sees it, federalism as a market-preserving political system functions because five conditions are simultaneously met:
1. Each level of government has a delineated scope of authority;
2. Each government is autonomous in policy;
3. Sub-levels of government have primary regulatory responsibility over the economy;
4. Free trade and free movement of people are ensured by the central government;
5. Governments face hard budget constraints (no inflation and no bail out of the lower levels by the central level).
In the last 70 years each condition has been gradually weakened. Condition 5, for instance, has been violated a few times but especially recently. If these conditions are weakened or absent, federalism doesn't work and competition between governments (which is the ultimate check on government power) can be dramatically reduced. As a result, governments cannot be stopped in their expansion of power.
If it takes a new amendment to the U.S. Constitution to restore its original intent regarding the federal structure, I am in favor of it and I support Barnett's project. I do not know how else it would be possible, actually. The federal government has lost credibility in this matter because none of the statutory limitations on its power to tax, spend, issue debt, and create inflation have really worked. I think only federalism properly designed could have an impact.