Why does it tell me the document is too big when it is not?

When this happens to me, I export the layers to files. (File>Export>Layers To Files).  This process usually isolates the layer or layers that are too big and I adjust accordingly.  Usually, it is a layer that is much bigger than what is shown within the frame of operation.

Normal psd files are allowed 2gb in file size.

In photoshop elements if you go to Edit>Preferences>Saving Files and set Maximize PSD File Compatibility to Never that should hopefully get the file size under 2 gb,

Maximize PSD File Compatibility saves a merged copy along with the normal psd for backwards compatibility with older photoshop elements versions or to enable non adobe apps to open the psd and can often double the file size of the saved psd.

You should also be able to save the document as a Tiff file, since Tiff supports file sizes of up to 4 GB.

The document size you are referring to inside photoshop elements is an estimate and i don't believe it takes into account things like maximize psd file compatinilty

Anyway here's what the photoshop Help says about it

Document Sizes

Displays information on the amount of data in the image. The number on the left represents the printing size of the image—approximately the size of the saved, flattened file in Adobe Photoshop format. The number on the right indicates the file’s approximate size including layers and channels.