Almost as soon as he took office as governor of the state of Georgia in 1971, Jimmy Carter summoned a young Texas Instruments executive named Peter Pyhrr to his office. Pyhrr, educated at the University of Illinois, had written an article in the Harvard Business Review describing a new way to cut expenditures through what he called “zero-base budgeting.” With Pyhrr’s help, Carter and Bert Lance, then Carter’s highway commissioner and now the White House budget director, applied the concept to Georgia’s budget—with some success. President Carter has since declared his intention to use zero-base budgeting to cut down the federal budget, and Pyhrr, 35 and now a New Jersey-based management consultant, is frequently in Washington advising government officials. He recently explained zero-base budgeting and how it can work for households as well as governments to Christopher P. Andersen of PEOPLE.
What is a simple definition of zero-base budgeting?
It is really a commonsense way of budgeting—for government, business and households—yet it is something that has been ignored for a long, long time. Instead of just adding on more and more to a budget each year, zero-base budgeting requires going back to square one and justifying all your expenses every year. That means asking if you really need to spend as much as you spent last year, instead of just deciding how much more you need to spend this year than last.
How would you describe the prevailing approach to government and business budgeting?
Get as much money as you can for your department. Once you’ve got it, find out what to do with it.
Who was the first to coin the term “zero-base budgeting”?
I believe it was Federal Reserve Chairman Arthur Burns who first used it in a speech in 1969. At the time he wondered aloud if the federal government could continue on its merry spendthrift way, and suggested that if we really wanted to control spending and inflation we might have to “zero-base” federal programs.
If this concept is just common sense, why does it come as such a revelation?
The fact is zero-base budgeting is a radical departure from the way things have always been done in both the private and public sectors. When you cut somebody’s budget, it’s considered the same as cutting his throat.
How did you develop zero-base budgeting into a workable approach?
We tried it out at Texas Instruments, where I was an executive in the late 1960s, with great success. The way it works is this: Each program, whether it has been around for 100 years or is a brand-new proposal, is analyzed annually. The budget is broken down into units called “decision packages,” prepared by the managers at each level. These packages include every activity of the department. We discovered to our horror that many programs were not analyzed every year, and that many were just funded as a matter of course—without a conscious decision being made by anybody.
What was the result at Texas Instruments?
There were significant reductions in some operations, but others in need of expansion were allowed to grow. In 1969 and 1970, when the number of employees at the Dallas plant alone was cut from 22,000 to 14,000 because of the recession, zero-base budgeting was used to make these reductions rationally. Zero-base budgeting has since been picked up by such firms as Xerox, Westinghouse and Allied Van Lines.
How did you bring your idea to the attention of Jimmy Carter?
In 1970, just after he was elected governor of Georgia, Carter read my article in the Harvard Business Review describing zero-base budgeting. He liked it, and later I was called in to help implement zero-base budgeting on the state level. Everybody told him, “Jimmy, it sounds good on paper. But it’ll never work here!” Of course, we tried it—and it did work.
What did it accomplish in Georgia?
One illustrative case: As long as anyone could remember, the stretches of grass along the state’s highways had been mowed to a distance of 30 feet on both sides. We went back, and decided that 15 feet was plenty. The budget at most mental health institutions normally increased 6 percent a year. Under zero-base budgeting, the funding increased at the same rate, but rehabilitation services tripled. We even found beekeepers in Georgia nobody knew we had.
Then why did the Georgia state budget grow when Carter was in office?
Yes, it did increase. But taxes didn’t. Now Texas and New Jersey are trying it, as are some state agencies in California and Illinois. Garland, Texas was the first city to try it—and staved off an increase in taxes. Wilmington, Del. is following suit. And zero-base budgeting has even been used to cut costs for the Greece Central School District in upstate New York.
Has zero-base thinking failed anywhere?
Yes, it was a disaster in New Mexico. In 1971 the legislators experimented with it, but were opposed by the governor and the experiment was dropped.
Can zero-base budgeting be implemented in the home?
Sure, and my family does it every year. First, take a look at your expenses: food, clothing, mortgage payments, vacations. Take a look at each area, and first ask yourself not “How much should I spend on my vacation?” or “Should I go to California or Hawaii?” Ask yourself: “Should I take a vacation at all?” If you are constantly sending shirts out to be cleaned at great expense, weigh that cost against the option of buying wash-and-wear. The key is sitting down and consciously setting your priorities. The alternatives are easy for the homeowner, but not so easy for the federal bureaucrat.
Can President Carter balance the federal budget by 1981?
He can balance it, sure. Does he have the political will? That’s another question. Carter may have made a mistake in declaring that he was going to implement zero-base budgeting across the board in one year. You can do that with a state, but not with a $459 billion federal budget. I support his position, but it’ll also be up to Congress. As a taxpayer, I only hope it succeeds.
What is Congress’ attitude?
Any congressman will stand up for reducing taxes. But not if it is at the expense of his own district. In fact, you could cut 15 percent out of federal expenditures today and nobody would notice any loss in services. On the other hand, Senator Muskie has introduced a bill to force Congress to review virtually every federal program within the next five years. Programs that don’t pass the review would automatically go out of business.
What is the major stumbling block?
The bureaucracy, with a capital “B.” Most of the program managers—and I’m referring to all the departments of the federal government—have never been asked to justify their programs. The people at the top of the heap—the Cabinet officers and sub-Cabinet officers—are in office an average of only two years. That means the show is really run by the faceless, apolitical bureaucracy.
Can Carter overcome this resistance?
If he were king of the United States, he’d still have a problem—the bureaucracy is that firmly entrenched. But yes, there are ways that he can make it stick.
Eliminating jobs is the toughest thing to do, but he can allow attrition to take its toll. Mass firings are a last resort; I don’t really think they’re necessary. To really make zero-base budgeting work, he’ll have to institute a long-term indoctrination program for federal decision-makers. That, plus a lot of pushing and shoving, should do the trick. Once they understand it, I believe the guys running the various departments will be the biggest boosters of zero-base budgeting. Why? Because for the first time the middle-level managers will have an input when it comes to where the money should go.
And if we keep the current system?
There will be bigger and bigger budgets, more and more taxes—and spiraling inflation. It may just be common sense, and most people may not think it has a chance in hell of succeeding. But if there is a way to balance the U.S. budget—and I believe there is—zero-base budgeting is it.