I see two issues: (1) as has been pointed out ad nauseum, players are moving where the money is, regardless of where they are from. I think your retort--that 1-2 year starters has generally been the norm anyway--is a good one, but the money and the free transfers has made a huge change in keeping players over their career. (2) Wisconsin is a smaller state than Michigan and Ohio--by a decent margin (Ohio more than double, Michigan nearly double). More importantly, UW doesn't have the donor base that those schools have. Your response--that Ole Miss and Indiana are hardly the traditional rich kids--is, again, fair. I agree with you. Right now, Wisconsin doesn't have the donor base supporting the program the way Mark Cuban is supporting Indiana. That may change. Wisconsin is a sports-mad state, and the donors may come.
Right now, if a 2- or 3-star recruit falls under the radar for Ohio State, Michigan, Oregon, etc., they may stay in Wisconsin for a couple of years, but after a breakout season, a program like Wisconsin may have real trouble keeping up with those bigger kids to write the kinds of checks that the player can now expect. That's the financial market working properly--as you also pointed out--which is probably ok. But it's frustrating change for us old fogies.
Now, the converse--as you point out--is that if Wisconsin really wants to keep that kid who is now a star, they just need their donors to pony up. And maybe that's fine. But...change. This is different than J.J. Watt becoming a home grown super star (which, to be fair is a terrible example, because JJ Watt transferred from a directional Michigan school after his first season, and left with a year of eligibility remaining because of $$ in the NFL).
As I said, I largely agree with you, but it is change, and I think that regionalism is a victim of the new system.