Epidemiology is pretty expensive as it is. The sign seems to still be positive for spending more on scientists - diminishing returns have set in hard in some areas like pharmaceuticals, but I haven't heard of an actual net negative.
That's my guess for this particular effect, and overall, but I have heard plausible arguments that when you add up all the different externalities their collective effect is large, proportionally. For instance, competition for grants diverts a lot of time from good scientists to grantsmanship, and reduces the autonomy of young investigators who might otherwise undertake higher-risk research. Further, it seems plausible that at the margin funding brings in lower-quality scientists who produce less value for the negative externalities they produce. More quantitative data would be very nice for testing these claims.
More evidence for this hypothesis:
Fanelli (2010). Do Pressures to Publish Increase Scientists' Bias? An Empirical Support from US States Data. PLoS ONE 5(4): e10271.