I would not characterize it this way at all. We are
(2) to the best of our ability. There is an ongoing problem with untagged
images, but progress is being made.
The issue is that we need to communicate better that fair use should only
be used as a last resort, and replaced with free content whenever
possible, even if the free version is inferior. This is something many
newbies and even some oldtimers don't get - they tend to treat fair use as
a loophole to upload anything they want. Unfortunately this tends to seep
through to other Wikipedias, who then simply say "from en:", even if they
don't have fair use.
There used to be a fairly complex process page at Wikipedia:Fair use, but
it has been replaced with a much simpler process ("explain why you think
it is fair use"), which again is mostly ignored. Perhaps a middle ground
can be found as part of the upload form redesign.
I'm a big believer in both copyleft and the public domain, but preserving
our fair use rights and making good use of them in cases of historically
significant images is important. We just need to find the right balance.
Do we have a nice, easy crash course in Wikimedia's copyright ethics and
rules somewhere that we can point people to?