I think the University is very happy with a 70,000 and change capacity. I think that they believe that Iowa just doesn't have a big enough population and alumni base to, year in and year out, sell out a larger stadium. Michigan, Ohio State and Penn State have some of the largest alumni bases in the country, as well as a large population base, to draw from, so yes, 100,000+ works for them.
Sell outs are very important to athletics departments. Besides non-sell outs looking really crappy on TV, and being bad for recruiting, why spend all of that money building capacity when there is no guarantee it will get used and return the investment?
On the surface, it seems like common sense that bigger is always better, and as a matter of selfish pride we'd all love to match up numerically with UM, OSU and PSU, but we are who we are, a low population, rural state. Des Moines would be a relatively small town in Ohio. As small as we are, we need to be VERY PROUD that we almost always actually do sell out 70,000+.
When/if they ever renovate Kinnick again, unless the population of Iowa tops 5 million by then (by 2060, who knows!), there is next to no chance that they will increase the capacity.