TLDR: In my campaigns from now on, Hobbits/Halflings and Dwarves will no longer be called as such anymore, and are simply varieties of Gnomes
The reasons for this change are really for semantical(is that a word?) purposes and out of respect of Tolkien and his imagined world and languages. Essentially Hobbits are an intrinsic part of Tolkien's world and legendarium, and as I feel they aren't represented very well in D&D and using a bastardized version of them as so called 'halflings' is kid of disrespectful to Tolkien and then not renaming the D&D version just shows the lack of effort; probably the only version that really stands on its own are the Kender from Dragonlance. Hobbits are specific to Middle-Earth and are present to portray specific thematic elements, so while I'm not changing the D&D rules or description I think it is a disservice to the actual Hobbits of Middle-Earth to continue calling them Halflings. Basically D&D Halflings are not Hobbits and deserve their own treatment divorced from the Halfling/Hobbit connotations.
Dwarves are a whole other can of worms. Naming a species or race(in the sense of an actual subspecies) dwarves is extremely problematic. Dwarfism is a real world disease/disorder/syndrome(its status in the medical community has changed over the years and is in fact now a disused term) and implying that people with Dwarfism are not Human should be seen as the bigotry it really is. Then if you say, no they aren't a different species, just a race of humans, you run into the problems of comparison with the actual medical condition; if dwarves have separate communities, then what about the dwarves who are born to 'normal' human parents, and what about the different varieties of dwarfism, etc, etc. It's better to not relegate human beings with a medical condition as a separate species or race or people from the rest of humanity. So this people will simply be another variety of Gnome in my campaigns.
On to how this works in game. Gnomes are a Species of the Homo Genus, and each variety described below is a Subspecies, or race, of that Species.
All Gnomes are short of stature, though their physical features may vary by type, some with long noses, long beards, large heads, etc. Gnomes typically live in a burrow of some sort made for that purpose. These burrows are generally clean and well-kept, and vary on location and specific adornments and disguises again based on the type of Gnome inhabiting the burrow. These burrows are generally well hidden and go unnoticed by most humans. The term Gnome is used by outsiders to describe the 'little people', each variety has their own term that they refer to themselves with.
Mountain Gnomes(Dwarves) refer to themselves as Denwarf's Folk and are native to the Altan Tepe Mountains and the Nation of Dengar or Rockhome. Mountain Gnomes live underground and they have a close connection with the Earth, minerals and metals. They are primarily miners, their focus is on extracting the metals and gems and other precious stone from the earth, and not necessarily the crafting or smithing of these items. They are enamored by the natural beauty and essence of the earth not the objects made from it. Mountain dwarves are barrel chested, with disproportionately short arms and legs, and both the males and females grow long and bushy beards, and generally are no more than four and a half feet tall.
Garden Gnomes(Halflings) refer to themselves as the Hin and call the Five Shires home. These people are much more numerous than appearances would lead an outsider to believe. The Five Shires may in fact appear uninhabited to an uninformed human. Their lands appear as one large garden, untouched by plow or traditional agriculture, yet every part of their lands is carefully maintained and produces bountiful harvests. These people live in shallow burrows in hillsides near the land they cultivate. Garden Gnomes have an affinity to living things and a natural talent in the cultivation of plants of all types. They have an average height of three feet, are beardless, have short legs and long torsos and arms, and large hairy feet. They dress in bright colorful clothes and are always wearing a brightly colored pointed cap and almost neve wear shoes.
Forest Gnomes(the traditional D&D gnomes) live in burrows in woodland areas, often entire clans occupying a single complex of burrows. These gnomes have a connection to the wild plants and animals and it is rumored can even speak with the animals of the wood. These gnomes also average about three feet in height, have large noses and ears and long beard often reaching past their knees.
Tinker Gnomes, commonly referred to as House Elves, are the only gnomes that are comfortable with living in houses of a fashion similar to humans. Some even live in Human houses or adjacent to human workshops and are considered good luck and will often discreetly mend broken objects or help the business of a human craftsman. These gnomes are smaller than most of their cousins, ranging between 2 and 3 feet in height usually. They tend to be thin and waiflike with long fingers, making them adept at manipulating objects, and bulging eyes and wrinkled skin, with sharp pointed facial features. Tinker Gnomes call the flying city of Serraine home. They have a fascination with mechanical things and are expert craftsmen of all sorts; they make great smith and jewelers, and tailors, and cobblers, and inventors, just to name a few of the crafts they are most known for. It is rumored they have unlocked a new sort of magical machine through the use of steam and have secret weapons that make use of a magical exploding powder.
Other types of gnomes, such as the deep gnomes or gray gnomes, are rumored to exist, but encounters with the world of man are sparse.