We replaced the jet pump with a submersible pump yesterday. The water was a little cloudy at first, pump guy said be patient. Now, there is silt and chocolate milky water coming out of yard hose and all sinks.

The water was perfect from the jet pump. We went deeper with the submersible, but I had no idea this would happen. I called the local water district and the guy said maybe we went too low, but it wasn't bad yesterday, it started 20 hours later.

Should I insist that we bring the pump up higher? How much higher?

I'd wait another day or two. When you put the sub pump down the well, it likely loosened a good bit of dirt which ended up in the water. It can take a while to get that cleared out. Run an outside faucet a few hours and see if it starts clearing. It might also be several years collection of "crud" at the bottom of the well which the sub pump has stirred up. In many cases the water clears in a few days. If that happens, then you are going to really like your new pump as opposed to a jet pump.