I don't think the CPUs are really getting smaller... while manufacturers are reducing transistor sizes on their chips, they're also increasing the numbers, and the actual physical size of che chip is probably very similar when comparing any recent generations of CPUs, of course there are exceptions such as at least the original P4 which was considered massive, as well as very old CPUs...especially the slot ones.
To actually make the things bigger, the transistor size should be increased, which means that higher voltages are needed to keep it operating (which works againist the idea of making chips bigger to improve heat dissipation) and operating frequencies can't be pushed as high (the heat won't be the only limiting factor, CPUs manufactured using a "bigger" process simply can't operate at frequencies as high as those with smaller transistors can).
EDIT: Also, the bigger the surface area, the higher the manufacturing costs. We want CHEAP processors, don't we?