Generally, I can appreciate the motives and designs of Libertarians. They're generally smart, and truly interested in extending Liberty - particularly free markets. In addition, someone I truly respect and admire would call himself a Libertarian, so I have a healthy amount of respect for them as a group.
But they're missing the boat when it comes to government, and here's why.
Take a gander at the Cato Institute web site (really: do it, it's very informative) and it won't take long to see what they are all about. Here's the mission:
The Cato Institute seeks to broaden the parameters of public policy debate to allow consideration of the traditional American principles of limited government, individual liberty, free markets and peace. Toward that goal, the Institute strives to achieve greater involvement of the intelligent, concerned lay public in questions of policy and the proper role of government." (emphasis mine)
On the surface, not so bad. But dig a little deeper and you'll see where Libertarians and Federalists differ (besides the fact that one of the lead articles on the Cato site is why Libertarians might consider breaking ties with the GOP and supporting... Democrats? Dear Lord!).
Now, there's no comparable Federalist think-tank, with perhaps the exception of the Federalist Society. That this is primarily a group of lawyers sort of makes it... less accessible than Cato. But here's the meat of their mission:
"The Federalist Society for Law and Public Policy Studies is a group of conservatives and libertarians interested in the current state of the legal order. It is founded on the principles that the state exists to preserve freedom, that the separation of governmental powers is central to our Constitution, and that it is emphatically the province and duty of the judiciary to say what the law is, not what it should be." (emphasis mine)
And here we have the crux of the issue: between limited government and balanced government, balance in government is primary in both order and importance. Balanced government, upon a thoughtful reflection, is the evident cause of a limited government; balanced government will lead naturally to limited government. The equation does not work in the inverse.
I've quoted Federalist 45 here before (most recently, here) but we'd do well to remember the importance of balance in government. If domestic matters are the sole domain of the states (limited exceptions apply; although this itself merits a separate discussion, suffice it to say in brief that in matters of inalienable rights, the general government is charged with the protection of our God-given rights), it follows that the relationship or interplay between taxation & spending and free markets will lead to a competition between the states for human capital.
Some states, of course, might wrongly choose to have unlimited government, and assume a great influence in the domestic matters of the people; however, such a burden - carried by the people of that state as it must be - will in short time become cumbersome and effect in the citizenry a fondness of and return to self-government. Such a sentiment will naturally lead to a change in elected governors who will promote this sentiment of the people.
Not to mention naturally leading to a government best described as limited.