You'd use this to describe someone else, to mean that person is so weak, useless or disorganised that even a ridiculously easy task would be impossible for him/her. I know the phrase as "he couldn't fight his way out of a wet paper bag." That is, the person is completely useless at standing up for themselves, or is useless at handling any form of conflict, physical or not.

He couldn't punch his way out of a wet paper bag = He is very weak when it comes to physical confrontations

can't fight hahaha We used to, and sometimes still do, get groceries in brown paper bags, little flat bags that were made of brown paper. When the bags get wet, they tear easily, so if someone is very weak, we say, "He couldn't punch through a wet paper bag" - and to punch, is to hit with your fist.

there is also, he couldn't organise a piss-up in a brewery. this is more vulgar. it means someone is so useless they wouldn't even be able to organise a party to get drunk in a brewery.

it's actually "we couldn't punch our way out of a wet paper bag" but more commonly used to describe other people... like he couldn't punch his way out of a wet paper bag... it just means somebody is useless. because if you are inside a wet paper bag and can't punch your way out, you can't do anything.