I think most people don't understand a lot of the reasoning behind Nintendo's decisions on the hardware for the Wii ...
The first thing I think should be brought up is that the low adoption rate for HDTVs in homes around the world combined with the likelyhood for a home console to be attached to a secondary TV (which would be less likely to be a HDTV than the primary TV) meant that the vast majority of consoles this generation would be bought to be played on a standard definition television. When you consider that 480p displays (roughly) 350,000 pixels per frame and the Gamecube was able to render between 250,000 and 500,000 multi-textured polygons with full lighting and effects its difficult to argue that you need a lot more powerful hardware to target this resolution; unless you're focusing on advanced shader effects, and the quantity of work required to produce those effects is one of the main reasons why development costs have increased so dramatically.
Also, as much as people talk about improving graphics makes games more accessable the opposite is often true. When you look outside the 20% most dedicated gamers at the broader demographic, a very large portion of the population views games with "Advanced Realistic Graphics" as games that are overly complicated and dull; and it is more likely that many of these gamers would readily pick up to play Super Mario Kart for the SNES than Call of Duty 4 for the HD consoles because of how the different look of the game translates into their expectations for the game.
The final reason (for tonight) is that Nintendo would have felt very uncertain about the reaction the Wii was going to see when it was released, and they probably wanted to limit their risk by selling hardware at a profit from the start and limiting the money that was spent on R&D and licencing of the hardware for the Wii. Beyond that, if the Wii struggled to find an audience, Nintendo had to manage the risk that they would be the only company providing much support for the system and they could hardly afford to be releasing a game every 4 years that cost $40 Million to make.
