People can ‘abide by’ the law, but can the law ‘abide people’?

Solution 1:

The "core" sense of abide is much bound up with wait (for a thing), withstand, sustain/maintain".

But one specific and relatively common sense today is to suffer, tolerate. Here are dozens of written instances of [Nature] cannot abide a vacuum where that meaning is applied metaphorically.

I therefore don't see any problem with, for example,...

There are some citizens the law can abide. Others (such as armed terrorists) can never be tolerated.

The sense of the word in law-abiding citizen is somewhat different. Here it means To stand firm by, remain true to; to act in accordance with, submit to (OED definition 14).

OP's citation from Time magazine humorously/flippantly juxtaposes the two different senses, in a context where all the editor is really interested in saying is that law-abiding citizen needs a hyphen.

Solution 2:

Law is the object of abiding there, not the subject. It’s just like with a gun-carrying populace: the people carry guns, not vice versa. You can see the same thing with other equivalent constructions, like an apple-eating contest or a bridge-building exercise. It all these cases, the first word is the logical object of the participial verb.