I'm not saying that universities aren't using PhD students as cheap labor and then cutting them loose (they absolutely are), but a more charitable side to it is

I'm not saying that universities aren't using PhD students as cheap labor and then cutting them loose (they absolutely are), but a more charitable side to it is not that universities want to "hire up", it's that they want diversity of thought/background. Hiring your own graduates, who have been "raised" in the same culture, can lead to isolation and groupthink plus it reinforces the existing specialties within your department. The degree to which so-called academic incest is a factor varies from school to school and department to department, but I don't think it's wholly unreasonable as part of faculty hiring considerations.