Show me a 5th level wizard who can kill a Balor one on one.
First of all, he slew a Balrog, not a Balor. And he died doing it.
Secondly, the 1e Type 6 demon (of which, Balor, was a named individual) that was so obviously inspired by the Tolkien Balrog was an 8+8 HD monster. It needs relatively little boosting on account of race for a 5th or 6th level wizard to match an 8HD outsider. For example, taking Gandalf to be closest to a 1e Agathion would give Gandalf 7+7 HD plus the spellcasting ability, plus clerical ability, plus psionics. He's very much a match for the Type 6 demon entry in the 1e MM with those sort of stats. If anything, Gandalf as an Agathion with 6th level M-U ability might be over powered.
The 3e Balor with its 20HD is a product of the same sort of inflationary mindset that the article is speaking out against and which has been plaguing D&D for years now. But a 6th level wizard with a half-celestial template is about an 11th level character, and an 8HD evil outsider would be a quite serious challenge.
The stat blocks I've provided account for pretty much everything Gandalf does on screen and is implied to do off screen (such as in the fight with the Balrog, or the fight against the Ringwraiths on Weathertop). And making Gandalf a relatively low level character explains a lot of things that would otherwise be difficult to explain, such as the fact that the party is in fact threatened at least some by 1 HD orcs.
And I've also explained the upper end of the power scale here pretty well. With Manwe and Varda as Solars, the rest of the Valar as something like Planatars, Gandalf as an Agathion with 6 extra caster levels fits about right. Sauron is a of the first rank of the Maiar, originally Morgoth's lieutenant, so Gandalf is not so powerful that Sauron is directly threatened even if Gandalf were uncloaked. But conversely, Sauron is not so powerful that his moving mere orcs about makes no sense compared to his personal power, as armies of mooks are quickly annihilated in high level D&D in the way sending mooks against the Justice League is pointless. Sauron might be in 1e terms the equivalent of a fiend lord. Remember, Gothmog - a balrog of largest size - was Sauron's peer. Sauron might be adequately represented in 3e terms something like an 11th level were-wolf ghost sorcerer with the half-fiend templates. In 1e terms, you'd probably stat him up like a fiend lord (something comparable to the 1e Amon stat block would work well).
Based on what he's shown to do, Gandalf is in no fashion nearly as high of level as characters like Fingolfin, Feanor, or Luthien . Those characters were sufficiently high level that taking on Sauron one on one wasn't out of the question. By making Gandalf merely a 6th level Wizard, you can have Fingolfin or Luthien as say an 18th level character rather than something near 30th level. And you still have room above their heads for the Valar without getting ridiculous.
Is this the only way to do things? No, obviously this is somewhat arbitrary. The books weren't written with a game system in mind. But it's a very solid coherent way of looking at the issues, and I think it's a very healthy way for a GM to look at it. In D&D, by the time you hit 8th level, you are dealing with Capes with swords. You already have the tools for some pretty epic stuff. It's a low powered Supers game by that point. Middle Earth is much lower than powered than that on the whole (at least, if we aren't talking about the legends of the first age).
