: And I'm not sure that power will ever be put to use in a way that delivers
: substantially better games. Look at how budgets have ballooned. You won't
: be able to keep throwing more money and people at it for better and better
: graphics, it's the law of diminishing returns.

There are two areas they can focus on that will provide a much better visual experience without affecting budget or staff.
Rendering at 1080p and 60fps.

Those are the main reason I've just been selling a bunch of Xbox 360 games, most of which I haven't actually got around to playing yet, because I can have a much better experience using the PC.
I have a PC wireless receiver for the Xbox 360 controller, so really once the game has started the experience is not any different from the Xbox, apart from the better, smooth graphics, ability to instantly take screenshots of any game and that it's completely silent.

I'll say something possibly heretical here. I even prefer using the controller over mouse and keyboard now. While its absolutely not as precise, I find it provides a much smoother and immersive experience.
Using a mouse to look around in an FPS is just such a quick and jerky experience.
A massive benefit in a MP shooter of course, but when you just want to take in the scenery in Skyrim, gently moving my thumb is a far more pleasant sensation.

As far as textures go, which is where the main time and money will have to go torwards improving, many developers actually already draw them at much higher resolutions and then scale them down to levels the consoles can actually deal with.
For example, Bethesda released an HD texture pack for the PC version of Skyrim.
They didn't re-draw every texture to do that, they just went back to their source files and didn't re-size them so small.

So it might not be as bad as you think.

For the record, I'm not joining the PC 'Master Race', lol.
It just so happens that in this point in time, the shortcomings of the Xbox 360 and PS3 hardware are becoming more and more apparent with their age, especially if you have a 1080p TV and so have to depend upon up-scaling games rendered at 720p or lower.
Being able to play games like GRID 2 at 60fps, despite the far more sophisticated graphical effects compared to Forza or Gran Turismo 5 is also a more pleasant experience.
Graphics are not everything of course, but when you're playing the same games, it's always nicer to play the best version of them!