Thank you for the opportunity to testify about federalism--the cornerstone of our Constitution. I will first show how constitutional federalism provided the greatest charter for liberty, wealth creation, and community in political history. Second, I will outline the sad decline of federalism in the twentieth century. Third, I will offer some thoughts on reviving federalism so that it once again will promote freedom, economic growth, and social solidarity.

Federalism was the Framers' most important contribution to solving the greatest dilemma of political theory. A government needs to be powerful enough to protect liberty and property, but a government sufficiently powerful to accomplish this end is also powerful enough to oppress the liberty of its citizens and expropriate their wealth.1 Democracy does not dissolve this dilemma: an elected ruling coalition may tax and regulate for the benefit of its members rather than in the public interest. Indeed, in a democracy concentrated groups of citizens, called factions by James Madison and special interests today, possess peculiar leverage to obtain regulation and spending for their private benefit. The resulting excessive taxation and regulation are social evils that both restrict the individual pursuit of happiness and reduce the wealth of the whole nation.

Federalism was the Framers' primary way of assuring that government would act only in the public interest.

The happy

paradox of federalism is that two interlocking governments can lead to less and better governance than a unitary state. The key to the structure is to use each level of government to constrain the other. In the original Constitution the states brought the federal government into being but strictly constrained its authority by granting it only certain enumerated powers. For the Framers, the essential domestic function of the national government was limited to sustaining a free trade zone to facilitate the exchange of goods and services among the former colonies and to provide for a common currency. So circumscribed, the national government posed little threat to liberties and wealth.

The Constitution left the rest of domestic regulation to the states. Although the states were thus repositories of enormous and potentially tyrannical powers, the free movement of goods and people among them restrained their ability to use their power to oppress the liberty or extract wealth from their citizens. If the states exercised their power unwisely free citizens could take themselves or their capital elsewhere.2 Thus the federal government was restrained by the strictly enumerated powers of the Constitution and the states were restrained by the competition that the federal government maintained through keeping open the avenues of trade and investment.'

Because of the limits the Constitution placed on regulation and spending for private interests, economists today have explained that the original constitutional design of a federalist free trading system was at the heart of the steady growth of the United

States that allowed it to become an economic superpower by the beginning of the twentieth century. Federalism was thus a large part of what made the Constitution the most wealth producing document in human history.

Federalism not only limits government but also improves the actions government necessarily must undertake. The first way it does this is to create a marketplace for governments.

By putting

state governments in competition with one another it forces them to innovate in the way they deliver public goods--i.e. goods that the market and the family cannot provide. Because of this competition, useful innovations in governance are readily copied. Federalism created a "laboratory of democracy" where the successful experiments of yesterday became the sound public policy of

tomorrow.

Second, federalism improved government decisions by pushing them closer to the people they affect. Groups of individuals may have different preferences for public goods. Thus human happiness will be enhanced by letting the smallest feasible unit of government deliver the public good in question. Federalism is the necessary beginning of this principle, called subsidiarity, but not the end of it. Just as federalism should force the national government to devolve appropriate decisions to the states, so too should state constitutions force states to devolve appropriate decisions to their localities.

Third, federalism increases civic responsibility.

Political

scientists have frequently noted that in large governments citizens