Race to the bottom

A student at Georgetown University's School of Government sat next to me on a cross country flight the other day.  We discussed this blog at some length and she expressed a concern that allowing States to make their own choices about items currently handled at the Federal level would lead to a "race to the bottom" (RTB).  The concern is that if one State is different from another residents will depart the State providing fewer benefits and move to the State providing greater benefits causing a counter-productive catch up approach from the first State.  Ultimately everyone loses.  Having subsequently thought some about this, I present the following thoughts:
1) There are countless counter examples to the RTB.  Virtually every business encounters and deals with competitors and few make the decisions that drive both out of business.  Most either find a win-win path or only one prospers -- but at least that one does prosper.
2) The functions currently performed by the Federal government consume resources that would presumably become State resources (assuming the total outlay to governments by citizens remains constant).  Since citizens of States are not currently leaving the State, and since presumably the State would be a better judge of what its residents need, it is likely that the same financial resources would be likely to make the residents happier rather than anxious to leave the State.
3) Perhaps a bad example given its fiscal condition,but California has for many years had significantly more restrictive laws in the areas of environmental effects than required by or implemented by other States.  This did not cause any mass migration.  Similarly other States have had unusually beneficial welfare and/or health care conditions, once again causing no significant migrations to or from other States.
As businesses that have opened plants in other areas have found, it is very difficult to get most people to move -- even when their moving costs are paid by the company.  Most of us want to be right where we are locationwise.
Further consider that we're talking about a survivability issue for the decision makers in a State.  If the Governor and the Legislature of a State make decisions leading to a RTB, they will lose their positions and livelihood -- their very survival as they have defined themselves will be at risk.  According to Maslow's Hierarchy of Needs their survival will dominate all other factors in their decision processes and they will refuse to enter a RTB.
Now weigh the above against the benefits of allowing, tracking and reporting on fifty different approaches as discussed in an earlier article.  Diversity has great potential for leading to convergence on a far better solution for every State.  I just can't buy RTB as a significant risk.