Does this mean that Ulfric and his Stormcloak army have more support and sympathizers with people then the empire does? It's kind of sad that they have to recruit locally. It seems as if they're having a difficult time recruiting people.
Not at all, it means that the Imperial Legion cannot send its entire army en masse to crush Ulfric's rebellion. Their main forces are pinned down and committed to working in other areas of the Empire, most likely helping rebuild and bring the Empire back to what it was like before the Dominion invaded, and to dissuade anyone else from stirring up trouble.
What he means is that rather than bringing in soldiers from other provinces, the Legion that's combatting Ulfric is more or less composed of the people of Skyrim. Jugding by the ethnic diversity you see in some of the Legates, it seems that most of the CO of the Legion are from Cyrodiil, but the infantry is largely made up of Nords who refuse to see Ulfric as a legitimate ruler. It points to this being much more similar to America's Civil war than its War for Independence.
And to answer your topic question. The Empire is not a scumbag. The adjective doesn't apply to non-persons. The Empire is ruled by many people and made up of many more. You can say the people running the Empire are scumbags, but the Empire itself cannot be considered as such. It's like saying a birdbath is a scumbag.
Hardly a government. The Empire IS the Emperor. That's how that political system works. And I would have to say that Mede is a pretty crappy emperor; I'm excited to see Ulfric get a turn.
Not quite. You're completely disregarding the Elder Council, which is a very powerful body in the Empire.