No, what Israel is doing makes sense from a strictly selfish point of view.
The question of 'Why doesn't Israel integrate the Palestinians?' is a good one. The answer is numbers.
Israel was founded as a Jewish ethnostate. Those who have immigrated there have done so because they wanted to live in a Jewish ethnostate. So one of the core values of the country is that it is primarily a place for Jews.
If Israel absorbed the populations of Gaza and the West Bank into Israel, the Jewish population would become a minority in Israel if not immediately then within a generation.
I don't agree with the idea of ethnostates in general and I do believe establishing Israel as one was a mistake.
... But if you imagine the viewpoint of someone who does want a Jewish ethnostate like so many in Israel you can see why this solution is a non starter.
Something like that, yes.