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I run an Innovation Lab at USC. It is supported by some of the most innovative companies in the world. I can tell you one thing with certainty—the truly innovative companies have learned to devolve power and flatten organization structures. If the United States is to survive as the design and innovation hub of the digital world, it is going to have to have a government structure designed for a 21st Century World. And that means that power and funding is going to need to devolve from the Federal level to the State and City level. I’ve been writing about this idea for almost five years, but I’m more convinced than ever that some sort of New Federalism is the only way out of the grinding political gridlock that is destroying our country. Democrats cannot fight this notion that power that is closer “to the customer”, is more efficient power.

But the problem with giving the states more responsibility is that you need to encourage mobility in America, not discourage it. If my 2050 version of Social Security is being managed at the state level, it’s just harder to move. The beauty of a Federal social insurance system is that there is never any impediment to get up and move to where the work is. Your social security number is good anywhere.

So let me specify what I think we need a Federal Government for:Departments of Defense, State, Treasury, Veterans Affairs and Homeland Security as well as  Social Security and Medicare benefits. Everything else should be a State matter. Certainly law enforcement agencies like the FBI and SEC would operate at the Federal Level to enforce Federal statutes, but the funding and the personnel for the departments of Education, Agriculture, Health and Human Services, Housing and Urban Development, Commerce, Transportation and Labor should primarily exist at the State level. Obviously both the Housing and the Agriculture departments in California and Mississippi would be concerned with very different issues. And of course as the Imperial Dreams of America come down to earth, the bloated Defense and Homeland Security budgets would shrink dramatically.

Now of course many of my peers, raised on the Civil Rights struggles of the 1960′s, view the whole idea of Federalism with distaste. Federalism, in their mind means “states rights” and George Wallace standing in the school house door. They say to me, “what is to prevent Kansas from passing draconian laws banning abortion and threatening the freedom of women?” And I reply: “Mobility”. If Kansas wants to go back to the 1950′s then only people who want to live in the 1950′s will stay there. You can go coast to coast on a bus for $200. You can move to the next state for $30. As Richard Florida  has shown, creative people will flee to locations that are open and modern.

This brings us to the last hurdle: taxation. The problem with 50 different tax regimes is that states will have a race to the bottom, based on what can only be called corporate blackmail. When BMW bids four states against each other for the lowest tax rate to bring a new factory to a state, everyone loses. That’s why I was so intrigued by Robert Frank’s solution of a Progressive Consumption Tax.

Under a progressive consumption tax, taxpayers would report their incomes, much as they do now. They’d also report their annual savings, much as they do for tax-exempt retirement accounts. The tax would be based on “taxable consumption” — the difference between their income and annual savings, less a standard deduction of, say, $30,000 for a family of four. Rates on additional expenditures would start low and rise gradually with taxable consumption.

What if this tax was collected nationally by the Internal Revenue Service, but the majority of the receipts were distributed on a per capita basis to the states? This would solve the race to the bottom problem, where states, like Airlines desperate to sell a seat, put themselves into bankruptcy.

As I have noted many times on this blog, I am with Jefferson and not Hamilton in the dispute over Federalism. I want the Federal Government to have less power and less money, so they don’t piss trillions down the drain in Iraq and Afghanistan. We have had promises for 60 years of a “peace dividend” that never materialized. It’s time to change strategy and make this Republic work again.