I believe that cedar contains phenols in the oils found in the wood which is what gives it the sent we like. The phenols have a reactive OH group (that can react with the linings of the respiatory system) and makes the birds more susceptible to other infections. A little is ok, but if you're cooped up in a bag of it, it's not so good.
Edit: It is basically an irritant.
Edit: It is basically an irritant.