This broad question is irresistible given that I graduated from Palo Alto High School ("Paly") in 1989 of all years. My frame of reference is childhood spent in Palo Alto, CA and Menlo Park, CA from ages 3-18, with some exploration of the greater San Francisco Bay Area. (Some family members still live in PA a quarter-century later.)
TL;DR: It was pretty awesome. If I could travel back in time, I'd do it again in a heartbeat or raise my own family there.
Despite its cozy, symbiotic relationship with Stanford University's computer science and engineering pioneers that stretched back decades, Palo Alto was much less monolithically tech-focused before the commercial Internet explosion of the 1990s. It formed the northern terminus of Silicon Valley back then (no, really; San Francisco, CA was almost an afterthought to the tech community). Tonier than its South Bay neighbors Mountain View, CA or Sunnyvale, CA, its neighborhoods ranged from middle- to comfortably upper-middle-class, with a couple genuinely wealthy enclaves in the heart of Old Palo Alto and Crescent Park. PA housed a disproportionate number of educated professionals of all kinds, including many Stanford faculty, of course. (Professors and their families really lived in those beautiful homes of Professorville.)
Nestled near the middle of a contiguous mass of suburbia strung between San Francisco and San Jose, CA, it was far enough from "The City" to avoid the bland-bedroom-community fate of inner suburbs. Still, despite the prodigious shadow cast by Stanford, Palo Alto wasn't a "college town" in the sense of more insular rural academic communities. I would argue the way the edges blurred into industry (the whole Santa Clara Valley), military/defense (NASA Ames and Moffett Field in Mountain View, Lockheed in Sunnyvale), Venture Capital on Sand Hill Road, commercial and investment banking, and other professions supporting the ecosystem of innovation (ahem) played a key role in its success.
While it was never quite as far out there as Berkeley, CA, Palo Alto had a strong streak of utopian flower-child liberalism in the '70s and '80s. I knew kids named Oak and Sparrow. There were a couple bona fide hippie communes up in the hills near Foothills Park; I had a friend born on one of them. The Grateful Dead (band) members famously bought instruments at Swain's music store on University Avenue where I would hang out years later. Some local figures played prominent roles in the conscientious objector/draft resistance movement during the Vietnam War. Joan Baez played anti-war benefit concerts at my elementary school, which her son Gabe attended (as did Steve Jobs' daughter Lisa — on the down-low — for a couple years). The legendary Homebrew Computer Club also met there at least once.
Keep in mind the The Cold War was still going strong, with President Ronald Reagan regularly denouncing the "Evil Empire," until George H.W. Bush took office and Mikhail Gorbachev presided over the opening of the former Soviet Union. Apart from the Loma Prieta Earthquake (October 17, 1989), my most vivid memory from the fall of 1989 (weeks into freshman year at college in New England) will always be watching and cheering CNN coverage of jubilant Germans demolishing the Berlin Wall. Virtually everyone I knew talked like the world was coming to an end when Reagan was elected president in 1980 and reelected in 1984. Mutually assured destruction in the event of nuclear war was a foregone conclusion in the '80s (watch WarGames (1983 movie) for kicks), and escalating the arms race with the USSR was thought to be reckless in our peacenik circles.
Climate change wasn't on the agenda yet, but environmental conservation and Sustainability were, particularly in the wake of the 1970s energy crisis. Engineers being engineers, there were already people geeking out over solar power, electric cars, alternative fuels, and all sorts of crazy bike-like contraptions. Otherwise, a fairly even mix of European luxury sedans, Volvo grocery-getters and reliable Japanese vehicles cruised the streets, with the occasional sighting of a Ferrari or other exotic supercar. Traffic lights downtown switched to blinking red at midnight.
Downtown Palo Alto was sleepier than today, with much less office space and more typical "main street" retail (e.g., Radio Shack, Men's Wearhouse, Jim's coffee shop, Swensen's ice cream, mom-and-pop bakeries and pharmacies), a good blend of restaurants and casual eateries. There was no Starbucks (company) yet, let alone Blue Bottle Coffee Co. or Philz Coffee. That soaring, airy space on University that now houses one of many Apple Retail Stores was a dumpy but beloved food court called Liddicoat's, packed with stands offering a wide range of cheap ethnic cuisines to downtown workers and shoppers at lunchtime.
Yuppification was already on the march, however, with Europhile luxuries like gelato stands and patisseries sprouting up. Fun was to be had at places like the New Varsity Theatre, which showed arthouse, foreign and independent films in rep (not to mention The Rocky Horror Picture Show (1975 movie) at midnight), and The Stanford Theatre (pre-David Packard restoration), which at one point showed second-run double features for cheap. Then there was the Festival Cinema on Hamilton, with pleasantly tacky decor and comfy bean bags on the floor.
City Hall looked exactly the same and was just as ugly.
If there's one place that best represents the changes sweeping through Palo Alto in the 1980s, I'd pick the club on California Avenue (Palo Alto) that was The Keystone ("The Stone"), a hallowed music hall with a counterpart across the Bay in Berkeley. (This would be the opposite end of California from Facebook HQ — long before it was a twinkle in Zuck's eye.) Unfortunately, it closed in 1986, just as I was getting old enough to go to all-ages shows, reopening as a dance club called The Vortex. I remember going there for a first date on a teen night where the "open bar" was soda.
The space served as a series of clubs over the years (The Edge, Illusions) until it was finally demolished in 2013, replaced by an office building (natch).
No question PA was already a desirable, upper-middle-class community known for its excellent public schools, and many families went house-poor or shoehorned into small spaces to live within the coveted district. Nevertheless, echoing Tim Berry's point, homes like ours in Old Palo Alto cost under $200K in the mid-1980s. (Granted it was small, squeezed into "poor man's Old PA" on the side of the neighborhood closest to the Caltrain tracks.) Similar places go for about $2 million today.