Interesting theory and I agree in concept, but I have lived in several states, some large, some small, and frankly they are not all that efficient or effective. Lots of cronyism, NIH, and frankly there really isn't much point in doing the same research, planning, administration 50 times. Add to that the things that must be nationwide, air traffic control, food and drug certification, defense. Interstate system, SEC.
My state is bankrupt due to terrible pension planning over the last 20 years. And seemingly unwilling to tackle the problem. Pass it on to the next election.
I really struggle to find the things that are handled significantly and measurably better at the local level. Look at education. By and large it is a locally controlled situation. Local teachers, local admin. Local buildings.
"No child left behind" is just a convenient scapegoat to blame for the last 25 years of failure.
I think it is too easy to over simplify the problems our government has to address, local state or nationsl.
I don't advocate a nation takeover, but state and local control is no panaccea either.