How owning and operating a small brewery led to profound revelations about our economy and daily life
Our adventure in this brewery has been fulfilling in many ways, some of which I had never anticipated. We chose this path because we wanted to do something consistent with our interests, something that we could pursue together, and something that would give us the satisfaction from knowing that we’ve made a positive difference in the world, no matter how slight that difference may be and no matter how few people notice or appreciate it. Selfishly, we also wanted more sovereignty — we wanted to control our own destiny with as few intermediaries as possible. And, perhaps foolishly, we wanted something challenging — a craft whose mastery would be a life-long pursuit, and a small business with enough challenges (opportunities!) to keep us toiling in honest labor so long as we wished.
Save for a few shortcomings, we were right that this path would fulfill those desires. But what I completely missed was that this way of life — of owning and operating Holler Brewing Co — would so dramatically change the way I see the world around us. Take health insurance, for example. In our past lives, our employer paid for (most of) our insurance and we paid whatever residual bills we got from providers. We knew, as everyone does, that the system was corrupt and could probably be improved upon. But that wasn’t our problem until we owned a small business. Then we could see the full system laid bare before us, nay, bearing down upon us, forcing us to confront it. This sparked a personal journey in exploring our health care system and alternatives, which I wrote about earlier this year, and which has given me an entirely different perspective than what I used to have.
In similar fashion, I’ve gotten to know how local government works, how the Three Tier Laws impact our industry, how 401k plans are a scam, and how our elected officials can throw out the rule book and tyrannize citizens. Many of these revelations have opened my eyes to ugly things about our world, but, even then, I’ve found the learning process to be exhilarating. As Socrates told us, “The unexamined life is not worth living”.
But here I will describe the greatest of all these enlightenments that I’ve ever experienced. It didn’t happen overnight, but over years of grappling with it, at first barely aware, then slowly building consciousness of it. That consciousness grew by feeding on experience, observation, and curiosity, until it became an idea so compelling and so pervasive in my thinking that I cannot imagine having lived without it for the first 33 years of my life.
I’ve known inflation exists since learning about it as a child. The cost of things tends to go up, and this is what we call inflation. In economics, we learn that this is influenced by the production of money. More money produced means more inflation. Inflation can be bad, especially if it becomes hyper-inflation, where currency values quickly head to zero as citizens rush to trade their wheelbarrow full of cash for a banana. But a little bit of inflation is good, because it motivates spending. And in a stable country like the U.S., we only have a little bit of inflation, on the order of 2% per year.
I learned this in high school economics, again learned it in college, and again learned it in business school. I went on to work for a corporation where this assumption was embedded in our models. In observation of daily life, this notion seemed valid — the cost of our groceries steadily rises over time, but nothing dramatic, and our wages go up too. It seemed like the system was working as advertised.
But after we started down this path of Holler Brewing, I started to notice something peculiar. Before we opened the business, we shopped our plan around to investors. The biggest surprise on their part would come when we explained that we had little ambition for growth. We wanted to start a small business and stay small, because growing entailed compromises that we did not wish to make. Our goal was to have our little corner of the world and focus on perfecting it; that we didn’t want to embark on world domination, instead, was bewildering to people. “If you’re not growing, you’re dying!” was something I heard in business school once, and it seems to be a widely held view.
Even after we opened, we spent a lot of time explaining to onlookers that, yes, operating this little Mom & Pop shop is really what we want to do. Yes, we can achieve our business’s objectives without growing indefinitely. No, we don’t want to expand just because the market might allow it. I wrote on it a few years ago, describing our place in the business cycle. Even at that time, though, I did not understand what was behind this obsession with growth.
But I finally figured it out. After all the dust settled from our start-up and expansion phases, we plateaued at our target size and got to see what steady operation felt like. And we noticed something: Our costs were rising. And they were not rising at 2%. Our largest cost component, Rent, was going up 15% per year. Property tax, insurance, and labor were all increasing in double digits. On the supplies front, malt has held close to the advertised 2%, but hops, yeast, and cleaning supplies have increased considerably more. Shipping rates, in general, are close to twice what they were when we started in 2016, in spite of fuel being cheaper. All the little things we get from Amazon and Home Depot either go down in quality, or up in price, or both, in a consistent and noticeable fashion.
And our personal costs have increased in this time, as well. Our personal rent was going up 15% per year until we bit the bullet and bought a home. Grocery prices have crept up and so have restaurant prices — it’s hard to find a decent dinner out in Houston for less than $100; coffee and pastry, with tax and tip, has gone from a $6 affair to a $12 one in short order. Rates for lodging, airfare, and Uber rides were increasing well-beyond the advertised 2% per year.
So I learned that inflation is not 2% — not even close. The Consumer Price Index, the measurement we often use to quote inflation, is nothing more than a formula carefully construed to show a low number (close to 2% per year). This is an example of Wittgenstein’s Ruler: Say you have a table in your kitchen, and using a ruler you measure it to be 1 foot long. While it is theoretically possible that the table is indeed 1 foot long, it’s far more likely that your measurement technique or tool is flawed. I know that inflation is not 2% just as I know that my kitchen table is not 1 foot long. We could go into detail about how the CPI is manipulated and misunderstood, but you can just as easily look around and see for yourself that inflation is not 2% per year.
This intense inflation puts relentless pressure on all businesses, including Holler Brewing. Our costs continue to rise, as does the ownership income required to sustain our lives. One way to mitigate this cost increase is to raise prices, and we do that. But this may only be enough to partially compensate for inflation — due to competition, we can only raise prices but so much. So, then, how does a business in a perpetually inflationary environment survive? It must perpetually grow, with that growth providing cost savings in the form of economies of scale. It turns out that there is something to that saying of, “If you’re not growing, you’re dying”. More precisely, you’re dying from inflation.
So the way out is growth, and you must pursue this growth forever. On a long enough timeline, any small business will either grow into a large business or cease to exist. In an inflationary environment, the idea of staying small forever is a fantasy. Remember this next time you hear your elected officials wax poetic about the virtues of small business.
I loved the movie, The Founder (2016), which stars Michael Keaton as Ray Kroc, the shrewd businessman who transforms McDonald’s from a mom & pop shop to a global empire. Without giving much away about the film, what I found so remarkable was how authentic and quality-oriented that original, 1950’s mom & pop McDonald’s was. The transformation to today’s McDonald’s not only involved aggressive expansion, but also compromises to the quality of their product. These compromises are mostly small and unnoticeable on their own, but when summed together they make the difference between a real cheeseburger and anything on the McDonald’s menu today.
This quality degradation is just another way to fight inflation. Raising your price is noticeable, whereas slightly reducing your quality — say, swapping out a 5 oz patty for a 4 oz patty, changing your frying oil from beef tallow to seed oil, or changing milkshakes from real to powdered milk — these changes are anything but transparent, but they offer the benefit of keeping profit without increasing price in an inflationary environment. Put differently, if you decide to combat inflation “honestly”, by raising your price, and your competitors decide to do it dishonestly, by changing their product in sneaky ways imperceptible to customers and keeping their prices lower than yours, how do you think that will work out?
This trend of quality degradation is not unique to McDonald’s. Every restaurant chain from Subway to Cheesecake Factory to Pizza Hut has experienced it and continues to experience it. Starbucks is another spectacular example, in just 20 years going from a paragon of exceptional quality to a last resort for caffeine and wifi.
Nor is it unique to restaurants. Sodas switched from real sugar to corn syrup with few noticing at the time, and by that same token you can rest assured anything in a grocery store with a long list of ingredients you don’t understand has been subject to similar degradation.
And beer! The American macro lagers, which became so devoid of flavor as to barely resemble beer, are a result of decades of this quality degradation, with assistance from mass industry consolidation, both of these trends a direct result of inflation. Craft beer in its nascence was simply a return to real beer, unwinding the corner-cutting tricks employed to produce macro lager, and this difference was so profound that it sparked a revolution.
Beyond food, look at the quality of buildings and furniture; of tools, appliances, and hardware; of kids’ toys, of almost anything you buy from a big box store or Amazon, and you see the same effect of quality degradation. Of course, there are a few industries where true innovation has reduced cost significantly enough to combat inflation, like mobile devices, microprocessors, TV’s, and automobiles. In these industries, quality has improved while price has stayed flat or even declined. But these are the exceptions that prove the rule — look around and it’s impossible to ignore inflation’s devastating impacts on the quality of what most Americans are purchasing and consuming.
It gets worse
This degradation of our products is not merely inconvenient, but poisonous. Under the pressure of inflation, real food becomes increasingly expensive, motivating companies and households to substitute processed food for real food. Margarine instead of butter, oil instead of animal fat, Frosted Flakes instead of eggs, fruit juice instead of fruit, kool aid instead of fruit juice, Spaghetti-O’s instead of spaghetti, TV Dinners for dinner. These fake foods, foreign to the human body until just two generations ago, have come to dominate the American diet in the place of real food. This ingestion of fake food en masse, for decades and without restraint, has brought death and sickness upon millions; all compelled by inflation.
Then there’s the wealth gap… When the money supply is expanded, the value of money is reduced. This siphons wealth away from anyone holding U.S. Dollars. But most of the country’s wealth, especially that owned by the wealthy, is not in U.S. Dollars but in assets: stocks, bonds, real estate, precious metals, etc. These assets’ values are not harmed by inflation. If you own a home, inflation makes your home go up in value (you may have noticed this phenomenon over the last 10 or 20 years). If you borrowed money to buy that home, you’re in even better shape — your home goes up in value while your mortgage payments stay the same. Meanwhile, renters get the opposite end — inflation causes their rent to go up. In summary: Inflation helps asset owners (wealthy) and hurts non-asset owners (poor). Running this effect over decades, one could expect to see the middle class vanish and the gap between haves and have-nots dramatically widened, and that’s exactly what has happened.
What causes inflation?
Entire books and courses are dedicated to the mechanisms and theories of monetary policy, but for the sake of brevity I will skip all of that here. Instead, I’ll just assert a couple of points:
1.) Inflation is not a natural phenomenon outside of our control — it is a creation of monetary policy. In other words, we have our government to thank for inflation.
2.) Our government creates inflation in several ways, but all of them arise from its ability to issue new currency without cost or limitation (i.e. to print money).
Whether you’re reading through a publishing of the Federal Reserve or suffering through a JPOW speech, you’re bound to hear our government reaffirm the notion that we need inflation — that a little bit of inflation is a good thing.
It’s easy to understand why the government wishes this to be true. Raising taxes and cutting spending are unpopular and difficult, but printing money is easy. And, if inflation is a good thing, why shouldn’t they do it? Thanks to this marvelous economic theory, our government can finance endless wars and bureaucratic sprawl on the backs of the poor and our future generations, and feel good about doing it!
It would be very convenient if this were true. It would seem to imply that there is a free lunch to be had. We should know better, and now I do.
It took me a long journey to get here, but I now know without a doubt that Inflation is not only harmful, but patently immoral. It is the underlying cause of a profound deterioration of our material and spiritual condition. It’s ruined our health, degraded our industries, depleted our soils, and destroyed our middle class. Over time, it continues to weaken us, impoverish us, and sicken us, draining our resilience and rendering us increasingly helpless and indebted.
And small business in particular is vulnerable to it. Six years after embarking on this journey of starting one, I now realize why small businesses constitute an endangered species. They’re swimming upstream against a current of inflation that will not let up, threatening their survival lest they compromise — grow, get acquired, or cheat their customers. Staying an honest small business forever is not a viable option. It’s a surefire way to Death by Inflation.
And maybe that’s where we’re headed. But I’m not ready to give up anytime soon. The rational thing to do is look down the road and adjust course, but I can’t bring myself to do it. Part of me is hopelessly optimistic that it will work itself out. Another part of me revels in the noble martyrdom of consciously taking on the Sisyphean struggle of fighting Inflation. And then there’s that feeling that people are counting on us. Even in staying small, our brewery’s network of friends, neighbors, fans, regulars, business partners, and employees has continued to expand. Sure, they’re not depending on us for survival, but we do make their lives just a little bit better. This is our service to the world, and I’ve yet to find a more compelling use of our time and effort.
Finally, I have this experience to thank for helping me understand the world better, and I’m pleased to be able to share my perspective with you.
Thank you for reading. Please feel free to comment.