stem height vs seat height

The aero benefit is only secondary to your being comfortable.  If you feel that raising the stem will be more comfortable then by all means do so. 

Q.  Did you set up the bike yourself or did you have it done by a professional?

While the 700 Club riders have more expertise in the bike fit question (Bear? Daremo?), I can tell you that the height differential between seat + aeropads (which rest on your handlebars, which are supported by your stem) is based upon "how low you want to go".

The general thought is that the higher your seat, lower your stem the more aerodynamic you are as you would tend to "trap" less air.  That said, not sure that the aerodynamic gain is worth the lack of comfort in a position that is too aggressive - especially if you are going to do longer distance races. (Alternatively, the shorter the distance, the more aggressive you can get insomuch as the discomfort is a cumulative effect - e.g. reach the point that the discomfort gets in the way of performance.)

Something of note of how the bike fitting rules of thumb changes ... the old school of though used to be that the narrower your elbows were in relation to your shoulders, the more aerodynamic and therefore faster you were.  The new school of thought is that the arm rests ought to be spaced just short of in-line with your shoulders in order to allow for greater lung volume.

Remember that you still have to run after the bike, so getting super aggressive on the bike should not be at the expense of the run. The lower you go in your aerobar drop, the more stress you put on your hamstrings and lower back ... two things that can be aggrevated on the run.

Bottomline, I believe it is as you say:

lower = flatter = faster

doesn't always hold true as you can loose power once you go past a certain point even though it means you're "flatter"

lower = flatter = more aerodynamic --> yes, but more aerodynamic doesn't ALWAYS equal going faster because if the reduction in power output outweighs the gain in aerodynamics you'll actually be going SLOWER even though you're in a more aero position.

something to consider...