I just found this fascinating article that deals precisely with the tension between libertarianism and federalism that bedevils much of the American libertarian movement, such as Ron Paul and his followers:
Basically, up until the passage of the 14th amendment after the civil war, the Constitution, including the Bill of Rights, was only held to restrain the powers of the federal government. Which, given the powers of the states at the time, was not much restraint at all, from the individual’s point of view. So in many ways, federalism was bad news for classical liberals and libertarians. It allowed slavery, for example.
The 14th amendment restrained the powers of the states from denying their residents the equal protection of the laws, and later Supreme Court decisions went further, citing the amendment as proof that the Bill of Rights should restrain government at the state, as well as at the federal level. The idea that the Bill of Rights guarantees the civil liberties of individual Americans against all levels of government is, therefore, a relatively recent one, and certainly not envisioned by the Framers.
I’m still torn on this issue. There is certainly a temptation to use federal power to force states to adopt policies that promote greater freedom. The trouble is that freedom’s ideological enemies are then given the same tool to push their illiberal agenda on the states, owing to the force of judicial precedent in our legal system. I’ll think about this issue some more and get back to you.