There is indeed a link between lung damage/disease and inhaling baby powder. Most likely talc based powders, but I can't recall the details off hand. You can probably research it via webmd, or google, etc...
Bert's Bees makes a natural alternative to baby powder; but I've never used it for setting so no ide how it'd work. Corn starch based powders are likely less risky; but again, I don't know how effective they are for this use. In the end, they'll probably not be any cheaper than a setting powder that is made for that purpose - I've never really looked at setting powder ingredients.
(I use baby powder as I don't go in face much - most of my performances are magic/stilt/juggle - so I only go in make-up a handful of times per year these days...)
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