You are partially correct magellan.
The decision of Washington DC was to "convert" many Defense contractors into GS workers. As a total, the DoD workers was a high population, but not as high as your numbers indicate.
There was intense argument within the DoD community as to whether is was cheaper (and more efficient) to hire more government civilians as opposed to contractors.
Contractors have the ability to hire and fire at will. They also (in my opinion) are more efficient.
I know that politics played a huge part: the government wanted its thumb under GS workers. It didn't diminish the people that performed the work - but the powers that be had their power.
However, the same people that were converted to DoD civilian were no less skilled. From Military Wording Dog (MWD) handlers to engineers. For the most part, however, the people employed were paid much less. That is simply a reality of the GS system.
I was unaware of the government "GSing" contractor positions. That is insane. We should be doing the reverse. This is corrupt, Obama, third-world B.S., moving contractor billets to his preferred union GS positions.
If a position is highly specialized, such as managing specific skills training or maintaining a particular weapon system, it should be a contractor. If it is manages money, it should be GS.
I personally do not understand today why we have any Wage Grade wrench turners working in weapons system depots. Depot maintenance on a military airplane is no different from a D-Check in the civilian world. This support, along with all of the non-flying training, should be part of the overall contracts for the weapons system.