Leaving the crafting question aside (paper wins), which is better: paper or plastic bags at the grocery store? The Institute for Lifecycle Environmental Assessment, after much scientific study, voted plastic in 1990. However, in 1990 the Simpsons had just started on TV and Bush the First had only been president for one year. Perhaps more data is needed.
The plastic bag folk provide a site that breaks the choice down into three components - reduce, reuse, recycle -- and they suggest plastic is the better option. (Duh.)
However, even the paper people at treehugger.org vote plastic is the lesser of two evils, after much consideration. Wow.
So, I guess the answer is .... plastic, please.