Judicial discretion under MMP: Smith v Fonterra

Robert Cooter's The Strategic Constitution is excellent. I used to teach from it in public choice. 

He provides a game-theoretic description of judicial discretion.

Imagine a unicameral Parliamentary system with no particular transaction costs in producing legislation. The executive and the Parliamentary majority have a unified ideal point. 

If the composition of Parliament and the Executive have changed since legislation was passed, and a case comes up revealing potential ambiguity in interpretation, the Judiciary can choose to interpret consistently with the bargain that was struck when the legislation was passed, the outcome that might obtain if the legislature and executive were to reconsider it, or the Judiciary's own view of what the public interest requires. 

The judiciary has zero discretion in that case. If it returns a decision inconsistent with Parliament's intention or views, Parliament immediately legislates to correct. 

In a bicameral system, legislating to correct a judicial decision requires agreement between the two houses. The executive will sit in the House; it needs the agreement of the Senate. If views between the two houses differ, the judiciary has discretion within the Pareto set: the set of all points between the ideal point of the House and the ideal point of the Senate. If the judiciary sets a decision outside of that Pareto set, the legislature reverts to some point within the Pareto set. 

He illustrates as follows.

In a unicameral Parliamentary system in a zero transaction-cost world, there is no opportunity to diverge. 

In a unicameral Parliamentary system that has a coalition, there is opportunity to diverge if the governing coalition does not understand the game or refuses to play consistently with it. 

If the bargain within the coalition is weak, the judiciary's discretion is constrained to the Pareto set of the members of the coalition. If it produces a decision outside of that range, the coalition can negotiate to overturn, returning legislation to the Pareto set. But it will not be able to find agreement to legislate to overturn a decision within the Pareto set: by definition, at least one member will prefer the Judiciary's stated position to the status quo.

A more clever coalition will realise that this game gives the judiciary room to unwind the bargain struck during coalition negotiations, and will pre-commit to overturn any decision that starts down that path - even if one party prefers the judiciary's decision in that particular case. 

That's the zero transaction cost world. A not-stupid coalition precommits to not letting the judiciary play shenanigans. And so the judiciary does not engage in adventures. 

Now let's move to the more realistic positive transactions cost world.

Parliaments have a habit of producing bad legislation whether through haste, incompetence, or unwillingness to resolve political conflicts within a governing coalition. In that latter case, explicitly political decisions may have been avoided through use of ambiguous language that will require the judiciary to take interpretive decisions of political consequence. You could imagine the legislation as not providing a point on the line, but rather a fuzzy shaded area spanning potential interpretations. And you'd hope that the legislature at least would have set legislation ruling out interpretations outside of the Pareto set.

Legislating around a decision is not costless. A governing coalition has its own legislative priorities. Time, effort, and drafting resource spent bringing an errant decision back in line means time, effort, and drafting resource not spent on other pieces of legislation. And some MPs' understandings of comity give the judiciary much room for shenanigans before the legislature would be allowed to act.

These transactions costs widen the range of judicial discretion. Even a governing coalition with tight agreement will not act unless the judiciary strays beyond a tolerable range. Beyond that range, the legislature will correct aberrant decisions. Within the range, the judiciary has discretion. 

And that turns things into an expectations game. If the judiciary expects that Parliament faces high transactions costs for reversion, then it will play as though it has a very wide range for discretion. Repeated refusals by the legislature to correct aberrant decisions affect those expectations. They reinforce the judiciary's view of its own discretion, and solidify legal academics' views that the court actually has that discretion. 

Smith v Fonterra looked like judicial shenanigans. Emissions have cumulative effects on global warming. No individual emission is the problem. It's their cumulative effect. Regulation makes far more sense than approaching it as tort. And we have a regulatory system around emissions. In the case of energy sector defendants, their emissions are fully covered by the ETS.

It took far too long to do it, but Parliament has finally moved to correct. 

I doubt it will be enough to convince the Supreme Court that the legislature is generally willing to incur costs to correct adventures by the judiciary. But it is a very good start. 

Australian defence

It's weird that NATO and others benchmark defence adequacy by spending as a fraction of GDP.

Surely treating inputs as targets rather than outcomes has been known to be a mistake for at least forty years.

Lifting defence spending, as fraction of GDP, to very high levels - but spending it on kit that can be easily destroyed by low-cost drones - seems like a bad idea. "It sounds like you're feeding multimillion-dollar tanks to thousand-dollar drones" kind of bad. 

Casey Handmer works through some obvious implications for Australia. 

The core technical fact that Australian defence planning has not absorbed is what Packy McCormick and Sam D’Amico call the Electric Slide: the five foundational technologies of the electric stack — motors, batteries, power electronics, sensors, and edge compute — have each decosted by roughly 100× over the past 30 years. The guidance electronics that in 1990 required a government munitions program now ship as the cheapest component in a disposable toy.

The practical result, demonstrated across Ukraine, Nagorno-Karabakh, the Red Sea, the cartel conflicts in northern Mexico, and now the Persian Gulf, is a cost-exchange regime in which a $500–$5,000 drone can plausibly destroy a $1M–$100M asset. Ukraine produced more than 2 million drones in 2024, and doubled that in 2025. Russia’s Black Sea Fleet, which in 2021 was significantly larger than the Royal Australian Navy, has been reduced by approximately 45% by an adversary with no navy at all. The dominant ships were destroyed by autonomous surface vessels and anti-ship missiles at a cost-exchange ratio on the order of 1:1000. Houthi operations have forced US carrier strike groups into standoff. Cartel drones routinely contest Mexican state control in Michoacán and Sinaloa.

...

Australia’s capability posture is built around high-unit-cost, low-count, foreign-sourced exquisite platforms — a force structure appropriate to a world where precision strike was a US/USSR duopoly and tactical mass was a minor consideration. That world is gone. In the world NDS 26 claims to operate in — the post-Ukraine, post-Red Sea, post-Nagorno-Karabakh world — tactical mass is everything, and the cost-exchange regime rewards the side that can produce cheap guided munitions in volume.

I'm less convinced of some of Handmer's arguments for a fully independent stack. Some insurance is too costly to be worth it. 

But the piece is interesting. 

As ANZAC Day approaches, imagine Australia and NZ taking these lessons seriously and taking a joint approach. Rocket Lab can launch small satellites. New Zealand has drone manufacturing. And maintaining ability to ship across the Tasman would seem a core objective for both. 

This may come as no surprise

RNZ reports:

An RNZ investigation into the tobacco blackmarket found packs of cigarettes and loose tobacco being sold brazenly over the counter at heavily discounted prices.

By law, cigarettes have to include pictures and health warnings covering at least 75-percent of the front of the packs. But the cigarettes being sold on the blackmarket are a throw back to the 1990s of glossy, embossed packaging and no ugly health warnings.

They continue:

Illicit cigarettes are being sold in Auckland without the warnings, with some going for as cheap as $13 a pack, less than a third of the price of a packet that includes excise tax.

An East Auckland shop visited by RNZ is selling 15 different packs of cigarettes. Only one carried the mandated health warnings.

Great that RNZ is starting to understand what's going on. 

Here's RNZ in 2024, quoting academics suggesting that claims about the illicit market were all down to industry influence. 

Smokescreen: Expert rubbishes govt claim of black market over smokefree legislation
...

But University of Auckland professor Chris Bullen said since the Smokefree Aotearoa goal came in in 2011, there had been no increase in the proportion of illicit tobacco products, and the absolute size of the illicit market had declined.

"We haven't seen that in New Zealand over more than a decade of increasing the price of tobacco. In fact, all of the evidence points to a decline. That may be in part due to a reduction in demand for cigarettes, because much fewer people are smoking, and they're smoking fewer cigarettes."

Tobacco companies have to declare to the Ministry of Health what was being released into New Zealand.

"By looking at the last 10 years of those records, the volumes of tobacco, reflecting demand for it, have been dropping quite dramatically. Smokers also report smoking less. The gap between what the tobacco companies release into the market and what people say they're smoking is also declining, suggesting that while there is illegal tobacco in the country, it's not increasing," Bullen said.

Bullen said the government should implement the legislation, and support Customs to continue to keep illicit products out of the country.

The claim of a rising black market was also used by the tobacco industry.

Bullen said the argument was a "zombie argument" that refused to die, and that politicians needed to think hard about repeating arguments used by the industry.

"The tobacco industry, it's in its interests to claim that things are bad so that the government takes its foot off the tobacco control accelerator pedal.

"They want to keep selling more product, they don't want the volumes of tobacco to be going down, because that would mean losing business. It's in their interest to have political support, whether it's conscious or unconscious, intentional or unintentional, for slowing the game down."

He has urged the government to keep the smokefree legislation.

"I just think unfortunately this government has been scared off, or persuaded by voices directly or indirectly from industry, that meant we're not going to see the best outcome here. And that will play out in the ongoing misery and premature death for thousands of people who shouldn't have experienced that if the existing act was allowed to play out over the next few years."

Australia's black market problem has been obvious for years.

Australia has been deporting gang members across the Pacific. It's dispersion of the tacit knowledge of how to run an illicit cigarette industry.

Fronting the fixed cost of establishing illicit supply channels to Australia meant the only thing to sort out at the NZ end was how to get it into the country, not where to get it from. 

It was always going to be a worsening problem here.

Labour's proposed policy package, endorsed by Bullen, included Very Low Nicotine Content rules. 

Those rules would have made the illicit market the only place to find tobacco with any appreciable nicotine content. Recall that the allowed nicotine levels in VLNC cigs are equivalent to a 0.2% alcohol maximum for beer. It's the equivalent of prohibition, for those who remember that US prohibition allowed near-beers with very low alcohol content. 

Consider how much worse the illicit market problem would have been if the current government had maintained Labour's tobacco policy package. 

Medsafe Delenda Est

Excellent news out of the UK. Abrysvo, a vaccine for RSV administered to pregnant women, reduces infant hospitalisation by 80%. 

From the BBC:

A vaccine during pregnancy which protects newborns against nasty chest infections is cutting hospital admissions of babies by more than 80%, UK health officials say.

A virus, called RSV, affects many babies in the first few months of life and can leave them gasping for breath and struggling to feed, with more than 20,000 babies ending up seriously ill in hospital in the UK every year.

Since 2024, women have been offered a vaccine from 28 weeks of pregnancy to protect their newborns.

A new study analysing the impact of the vaccine shows it gives "excellent protection" to babies when they are most vulnerable to RSV, the UK Health Security Agency (UKHSA) says.

RSV (respiratory syncytial virus) is one of the main reasons young babies are admitted to hospital before the age of one.

The UK govt website provides a few more details (alas, the link to the paper is broken).

The vaccine here is going to have been Abrysvo; it's the one that England rolled out against RSV.

Last year, I noted Abrysvo in a Post column on the proposed Medicines Amendment Bill. 

I'd written:

New medicines are slow to be authorised for the New Zealand market.

Even if it a medicine has already been approved by many other trustworthy overseas regulators like those in Canada, the UK, Australia and the EU, Medsafe can take a very long time to evaluate a medicine.

But pharmaceutical companies are not quick to get their medicines into our approval process. New Zealand is a tiny market. We are not at the top of anyone’s priority list. Medsafe will not assess a medicine without an application.

Consider RSV – the respiratory virus whose name is utterly unpronounceable when it isn’t an acronym. It is highly contagious. Pregnant women, infants, and some young children are more at risk from it – at least according to the Immunisation Advisory Centre.

Vaccination against RSV is available for New Zealand’s elderly. But while 40 other countries allow access to Abrysvo, a vaccine administered to pregnant women to protect their infants, Medsafe’s database shows no evidence that its manufacturer has applied for New Zealand approval.

New Zealand researchers helped with the clinical trials that proved its safety and effectiveness. But the vaccine is not available here. Simply being good enough for 40 other countries and tested here isn’t sufficient.

I noted that the Bill's proposed fast-track approval process for medicines wasn't what had been promised in the Coalition agreements. Those promised automatic approval if at least two trusted overseas regulators had approved a medicine - regardless of whether anyone got around to applying for Medsafe authorisation. 

And I worried that the fast-track would not solve the problem if the underlying problem is pharma companies not seeing NZ approval as being worth the time. We're an afterthought. 

The FDA and EMA authorised Abrysvo in pregnancy, to protect infants against RSV, in 2023. 

When I made my submission on the bill last year, a search of the Medsafe database showed no evidence that application for NZ approval had been made. 

As of this afternoon, the same search yields the same result. 

If you're pregnant or are thinking of becoming pregnant, talk to your GP about s29 access to Abrysvo. It might be tough. There might not be anyone importing it. And a lot of doctors don't like using s29. 

It is approved in Australia. I don't know whether Australian doctors are willing to dispense for Kiwis willing to pay. 

This is so stupid. 

Medsafe authorisation stands between pregnant women and this vaccine, approved in dozens of countries, and well-proven in the UK. 

Fingers crossed that Pfizer is just holding off until the 'fast-track' verification process is live, and that it goes live fairly soon. 

A closing snippet from the BBC piece. Delays can be costly. 

The vaccine didn't come in time for Laine Lewis's son Malachi, now 12 years old. He developed a cold as a baby which deteriorated so much that he was taken to hospital, diagnosed with RSV and put on oxygen. Malachi later stopped breathing and a scan soon after revealed brain damage.

His mum has said it's important his story "doesn't scare people" because what happened to Malachi was very rare.

But she added: "I'd encourage people to take the vaccine for RSV because it will help their child."

Dr Watson said the vaccine could "make a big difference to keeping babies safe" through the winter.

"I would strongly encourage any pregnant woman to discuss it with their midwife, other health professionals, and be ready to have the vaccine at their week 28 appointment, or another vaccine appointment arranged soon after that."

Latest figures show around 64% of pregnant women in England are getting the RSV vaccine, but that falls to 53% in London.

Addendum: Nothing here argues a case for government funding. That would require its own more rigorous case. I do not know why anyone would read the above as arguing a case for funding. It is only arguing a case for authorisation, so those willing to pay can have that's choice, whether or not it would be sufficiently cost-effective to warrant funding. And remember that some medicines get pulled from Pharmac's evaluation queue for want of a NZ sponsor for Medsafe authorisation. 

Access to Cash

Andy Macdonald over at BusinessDesk asked me for comment on the ongoing RBNZ cash-access saga.

A snippet:

The New Zealand Initiative’s (NZI) chief economist, Eric Crampton, said it was “deeply concerning” that the RBNZ hadn’t sought Treasury and Crown Law advice on the consultation’s legal basis.
“The [Reserve] bank has no express statutory power to mandate where banks provide retail cash services,” Crampton, who co-authored a column about this with Roger Partridge, said.
“It [RBNZ] appears to be borrowing coercive prudential authority and deploying it where no such power exists.”

Roger Partridge and I wrote up a bit on it a couple weeks ago over at Newsroom. The short version: RBNZ is undertaking a consultation process over a proposal. Regardless of the outcome of that consultation process, RBNZ does not have the statutory authority to implement the proposal.

It isn't just that RBNZ very clearly does not have statutory authority to require commercial banks provide specified cash services in places where the banks view such services as not commercially viable. 

If you want a fun illustration of that, go over to Newsroom and look at the comments section. Comments there are always Mos Eisley spaceport. But sometimes they're a useful kind of awful. There you'll find former RBNZ board member and Vic Uni academic Chris Eichbaum grasping at implausible straws trying to find a statutory authority. He chides me and Roger for failing to refer to subpart 5 of the Reserve Bank Act, perhaps hoping that nobody would ever bother reading subpart 5. Precisely nothing in subpart 5 enables the RBNZ to compel service. Read it for yourself. I go line by line through it for Eichbaum, and there's really nothing there. 

And it also isn't just that the RBNZ's basic economics around the justification for the proposal is, frankly, flat-out wrong. Here's Martien Lubberink on that issue. 

It's also that the Reserve Bank asked Parliament to give it that power, and Parliament declined to do so despite having had two legislative opportunities. 

So. What the hell does the Reserve Bank think it's doing? Is the consultation process a lobbying effort trying to get public support for something that Parliament has not been inclined to allow RBNZ to do? Is it the RBNZ trying to strongarm the commercial banks into doing 'voluntarily' what RBNZ wants, despite the lack of statutory mandate, because of the risk that RBNZ can impose very large costs on regulated entities that displease it? Or did it simply not occur to the Bank that it does not have the statutory authority to enact its proposal - despite having asked Parliament a few years ago for that kind of authority?

I'd sent an OIA request through to RBNZ, hoping to figure out what the RBNZ thinks it's doing. That request:

Dear RBNZ,

We seek information about the future of cash workstream. RBNZ is consulting on a proposal that would require banks to provide additional cash services. We can see no authorisation in either the Reserve Bank Act or the Deposit Takers Act for this kind of regulatory imposition. So we are curious how it developed to be a proposal for external consultation.

We consequently would like to know:

1. Did the Reserve Bank consider whether it has the statutory authority to require banks to establish a national cash distribution network?
2. Without disclosing privileged legal advice, which section of the Reserve Bank Act or the Deposit Takers Act would the Bank view as providing that statutory authority?
3. In its 2019 consultation, the Reserve Bank suggested that new regulation-making powers be added to the Reserve Bank Act to be used if there were risk of significant reduction in access to cash. If the Bank now views itself as having statutory authority to compel businesses to establish a cash distribution network, why did it ask, in 2019, to be granted those powers? And did Parliament’s refusal to take up that opportunity in the Reserve Bank Act 2021 and the Deposit Takers Act 2023 enter into the Bank’s deliberations about the current policy proposal?

Please provide internal correspondence, memos, briefing notes, aide memoires, and any other documentation shedding light on these questions. I am particularly interested in any internal quality assurance process that this paper undertook, whether that process considered the Bank’s legal authority to undertake what was proposed, and whether the Board’s advice was sought as part of the process – particularly on the Bank’s statutory authority to impose the proposed requirements.

Request sent 4 March. On 26 March they punted it out to 2 June. 

So we still don't know what the heck RBNZ thinks it was doing. Perhaps RBNZ is trying to figure out what it thought it was doing. 

I expect that they will play motte-and-bailey with this, saying it's just a consultation and that they would only need statutory authority if they were going to actually implement the proposal. 

But that's inadequate when they have substantial discretionary power over the banks and a proposal like this can be viewed by those regulated by RBNZ as a requirement to 'voluntarily' come to some equivalent arrangement with RBNZ lest bad things happen under different aspects of the RBNZ's authority. And it's also inadequate where the consultation process can be viewed as an attempt to lobby Cabinet for an expansion of RBNZ powers that Parliament has already twice failed to provide. Should government agencies spend time and effort on public consultation processes aimed at swaying their Ministers? 

I will be interested to see the OIA materials. But it feels like substantial governance failures at the Bank. 

Addendum: see also Simon Jensen's piece at BusinessDesk from a few weeks ago. 

Addendum 10 April: The RBNZ sent an advisory note this afternoon. A relevant section, emphasis added.

“As part of the consultation, we have received questions about the legal basis for the proposal we are consulting on, and we will release more information about this within two weeks. This may assist people in shaping their feedback on the consultation. We will also provide some Official Information Act responses that will be completed within that timeframe,” says Karen Silk.

RBNZ is responsible for ensuring that cash meets needs of the public.

“No decisions have been made yet on the proposals outlined in the consultation, and we want to hear a wide range of views about what the minimum services should be locally to withdraw cash, deposit cash, and swap cash free-of-charge, in every district of New Zealand. The public’s views are important and will help inform our approach,“ says Karen Silk.

“Our preferred approach is to work with banks to explore how the public’s access to cash services could be improved on a voluntary basis and we welcome responses from the cash industry,” says Karen Silk.

On a 'voluntary' basis. Kinda funny that one. The Commerce Commission set up a very large (and I think unneeded) grocery regulator because it worried that supermarkets have too much power over their suppliers and that voluntary arrangements between supermarkets and suppliers might not be all that voluntary.

Whatever you think about grocer power over suppliers, the Reserve Bank of New Zealand has far more power over the entities that it supervises. And here wants to come to a 'voluntary' arrangement with the banks, to achieve an outcome that the RBNZ cannot directly regulate to achieve, because it does not have the mandate. 

Thank a migrant

Combine a points-based migration system that welcomes higher-earning younger people with progressive tax systems and you get a result like this, from Tim Hughes at Treasury:

The central finding of this paper is the simplest. In aggregate, the foreign-born are becoming increasingly important for the country’s tax base. Foreign-born people made up 24% of the population in 2000, also paying 24% of individual tax on market income. Since then, the foreign-born’s share of the population has grown, and their share of tax paid has grown even faster. In the tax year ending March 2024, the foreign-born made up 32% of the population, and paid 38% of the tax.

As Lewis Holden put it on Twitter: 'Goddam immigrants coming to our country, paying all OUR taxes'.

The high cost of free parking: urban intensification edition

Problem definition matters in policy.

I worry some people in Auckland are experiencing poor parking management by Auckland Council as being a problem of the removal of mandatory parking minimums. 

The problem isn't removing mandatory parking minimums. 

The problem is the failure to price or manage on-street parking in places subject to intensification. Expectations of being able to find free on-street parking reduces demand for on-site parking where on-site parking has high opportunity cost. 

So solve the underlying problem. It isn't that hard. Set resident parking passes for the street, keep some spaces back as paid parking (easily managed through apps), and let folks decide whether they want to pay for an on-street spot or forgo some living space on-site or not have a car. 

My column in yesterday's Post.