Yes... that applies to both publishing and recording. The video coming in from the publisher is what goes out to the subscribers and/or is recorded to file, and there is no API for accessing the video data directly (which is a bit of a drag... it would be nice to be able to reach in and touch those video frames).
About your settings, remember that the bandwidth settings is in bytes, so your 51200 setting = 400kbps, which isn't all that high (I regularly publish 1Mbps video without issue). The only limiting factor when it comes to publishing bitrate is bandwidth available at the client and at the server, and most often, the limiter is available upload bandwidth at the client side.
I do't know if Adobe has a published recommendation on publishing bitrate, but if there is, I suspect it's something along the lines of "make sure you have a fat enough internet pipe to publish your video... don't try pushing an elephant through a drinking straw".
You are correct about connection degredation... if a publishing client experiences a slowdown, the flashplayer will buffer video consistent with your client side netstream.bufferTime setting (assuming the publishing client is the flashplayer), and then it will start dropping video frames... which will create the jerky, jumpy playback you describe.