I've been playing with it, and I see the problem. vec is horrible, because it reverses everything. When you pack them together by sevens and take them apart by eights, it's a mess to try to get everything reversed.

Here's a version with pre-sized return strings, using vec (but there's no need for substr). No packing, so no reversed-bits madness to deal with.

sub shrink {
    my $shrunk = "\0" x (length($_[0]) * 7/8);
    my $bit = 0;
    for my $orig_bit (0..(8*length($_[0])-1)) {
    next if $orig_bit % 8 == 7;
    vec($shrunk, $bit++, 1) = vec($_[0], $orig_bit, 1);
    }
    $shrunk;
}

sub grow {
    my $grown = "\0" x (length($_[0]) * 8/7);
    my $orig_bit = 0;
    for my $bit (0..(8*length($_[0])-1)) {
    vec($grown, $orig_bit++, 1) = vec($_[0], $bit, 1);
    vec($grown, $orig_bit++, 1) = 0 if $orig_bit % 8 == 7;
    }
    $grown;
}
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