I find it pretty crazy to think that the next generation will offer the kind of huge graphical leap in 2D graphics that we haven't seen for a long time now. The only thing that's changed in a decade is the screen resolution and the aspect ratio. Regarding that 2D game video you posted, yeah, there's probably an effect here and there that's not really possible on last-gen hardware, but "an effect here and there" is exactly the kind of marginal improvement you end up talking about when you're in the "diminishing returns" phase (I wasn't impressed by the heavy particle effects--that was completely possible last gen). The jump from Odin Sphere, Alien Hominid, and Muramasa to DET is little more than screen resolution and a few effects, nowhere near the jump from, say, Contra 1 to Contra III. Or Double Dragon II to Streets of Rage 3. Or Gradius (NES) to Thunder Force IV (Genesis).
That other game you posted uses 3D graphics.
From the footage I've seen of Crysis 3, there are areas of Crysis 2 I'd say look 75% as good. Easily. The jump from 360 Crysis 2 to PC Crysis 3 is certainly nowhere near as large as the jump from, say, the SNES version of Doom to Perfect Dark.
That kind of proves my point. Better-looking trackside grass is not the kind of dramatic, global improvement we've seen from generation to generation. Most of the global things are done correctly now. The lighting looks physically correct, there are very few visible polygon edges, there's very little texture pixelation, the overall coloration matches reality pretty well, etc. Trackside grass is a small-scale detail. It's a thing, yes, but not nearly on the scale of, say, going from nearest-neighbor sampling to bilinear filtering, or going from flat shading to phong shading, or going from SDR to HDR lighting, or going from thousands to millions of polygons in a scene, or going from simple texturing to texture + normal + specular. If you drive around the track from a cockpit view instead of parking on the median so you can stare at the grass, the differences between a current-gen driving sim and real-life footage are, in my opinion (and depending on the game, track, and cars), not much bigger, possibly smaller, than the difference between current-gen sims and last-gen sims.
http://www.youtube.com/watch?v=SIDE58RRzmU
http://www.youtube.com/watch?v=S9s_G1ph_vA&feature=related
Here's a problem with this discussion: You are treating the term "diminishing returns" as equivalent to "no returns." That's not what the term actually means. It doesn't mean, "there is no visible improvement at all;" it means, "the overall improvement you get is smaller than it was last time." And that's what you'd expect from any kind of converging sequence. Or if you stick to Grand Prix games, consider these jumps:
Virtua Racing (Genesis) > F1 '99 (PS1) > F1 '06 (PS2) > F1 Champ. Ed. (PS3)
Impose any measure you want, the hugest jump is by far the first one, and the first game is kind of cheating by having a fancy new 3D chip on the cartridge...and if you want an even bigger jump, we could put the NES F1 Racing game at the beginning.