Several of the answers given here are good answers. There are technical issues in increasing the size of the CPU and it will lead to a lot more heat to deal with. However all of them are surmountable given strong enough incentives.
I would like to add what I believe is a central issue: economics. CPUs are made in wafers like this, with a large number of CPUs per wafer. The real manufacturing cost is per wafer, so if you double the area of a CPU you can only fit half as many on a wafer, so the per-CPU price doubles. Also, not all of the wafer always comes out perfect, there can be errors. So doubling the area doubles chance of a defect in any specific CPU.
Therefore from the economic standpoint the reason they are always making things smaller is to get better performance/mm^2, which is the determining factor in price/performance.
TL;DR: In addition to the other reasons mentioned doubling the area of a CPU more than doubles the cost.