We examine the dynamic effects of natural disasters in US states and relate them to state and federal fiscal policy. Disasters have significant negative output but less severe unemployment consequences. Real effects vary spatially: coastal and poor states recover more slowly. States with less stringent budgetary requirements and/or rainy day funds have insignificant real costs and negligible debt consequences. Countercyclical fiscal policy reduces the severity of the real downfall. Both federal and state governments respond to the disaster shock and aid by the former helps to lower the short run costs on state debt. The ability of states to run deficits and temporarily increase debt is a key factor in the recovery.